Ask Experts Questions for FREE Help !
    Iceberg_01's Avatar
    Iceberg_01 Posts: 3, Reputation: 1
    New Member

    Jun 4, 2006, 09:34 PM
    Return on Assets & Return on Equity

    Lily Cosmetics has annual sales of $500,000,000. They maintain a net after tax profit margin of 5% and they have a sales-to-assets ratio of 4.

    A) What is the Return on assets?

    B) If the debt/equity ratio is 0.5, what is the Return on Equity?
    CaptainForest's Avatar
    CaptainForest Posts: 3,645, Reputation: 393
    Ultra Member

    Jun 5, 2006, 02:27 PM
    Return on assets = Net Income / Total Assets

    Total Assets = sales-to-assets ratio of 4 and sales is $500,000,000
    Total Assets = 4 x 500,000,000
    Total Assets = $2,000,000,000 (2 billion)

    Net Income = .05 x 500,000,000
    Net Income = $25,000,000

    Return on assets = Net Income / Total Assets
    Return on assets = 25,000,000 / 2,000,000,000
    Return on assets = 0.0125 = 1.25%

    Return on Equity = Net Income / Shareholder's Equity

    Net Income = $25,000,000

    Shareholder's Equity Calculation:
    Debt/Equity ratio of .5
    Therefore, total debt = total equity

    Assets = Debt + Equity
    So Equity = Assets / 2
    Equity = 2,000,000,000 / 2
    Shareholder's Equity = $1,000,000,000

    Return on Equity = Net Income / Shareholder's Equity
    Return on Equity = 25,000,000 / 1,000,000,000
    Return on Equity = 0.025 = 2.5%

Not your question? Ask your question View similar questions


Question Tools Search this Question
Search this Question:

Advanced Search

Add your answer here.

Check out some similar questions!

Assets, Liabilities and equity [ 4 Answers ]

I need to know if this is correct, if its not an explanation would be great :) I'm not an accounting student, just taking it for GE and I'm just confused.. Indicate where each tansaction causes an increase (+), decrease (-) or no change (NC) in assets, liabilities and equity (type of...

State Tax Return [ 2 Answers ]

I am a F1 student in the state of California. I worked for 10 weeks in New york. Do I have to file a state tax return both for New York and California?

Noise from return air [ 3 Answers ]

There is loud noise coming from air return (12x12"). This one is at the ceiling in family room on first floor. So they cut another hole (same size) in laundry room which is behind family room to open another return using the same duct. There are still noises from both returns but better in...

View more questions Search