I'm in an accounting class right now, and I'm having the hardest time with a problem I was given. I hope someone here might be able to guide me in the right direction with it.
The Company has a return-on-assets (investment) ratio of 12 percent.
a. If the debt-to-total-assets ratio is 40 percent, what is the return on equity?
b. If the firm had no debt, what would the return-on-equity ratio be?
Now, I know that the return on equity = net income/average equity
The debt to total assets ratio = total liabilities/total assets
and that the return-on-assets ratio = net income/total assets
The problem is that I don't know how to use those formulas with the percentages given to figure out the values I need to us. I've read the entire chapter, and I've searched at various accounting tutorial websites online. I can not find any similar problem though.
My guess is that either you divide the 12% and the 40% or you multiply it. I don't know though. I'm not very good with percentages and ratios. There's not much to do with two numbers though - add, subtract, multiply or divide. If I was given at least one value in a monetary amount, I could probably figure it out, but that would be too easy, wouldn't it? :p I can't wait until this class is over in about 5 more weeks! lol
Thanks in advance for any help.