EBK CFIN
EBK CFIN
5th Edition
ISBN: 9781305888036
Author: BESLEY
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 2, Problem 16PROB
Summary Introduction

DB's total assets are $440,000, return on assets is 8%, and its debt ratio is 20%. Calculate the net income and return on equity.

The total asset turnover ratio is the efficiency ratio which is used to measure how much sales is generated by using the firm's total assets.

Total assets turnover ratio=Net salesTotal assets

Debt ratio is the percentage of total debts divided by total assets which measures the percentage of liabilities that a firm has in terms of total assets. A higher ratio indicates that the firm is at risk.

Debt ratio=Total debtTotal assets

Return on assets is used to measure how profitable a firm is related to the firm's total assets.

Return on assets=Net incomeTotal assets=Common equityTotal assets×Net incomeCommon equity=(1Debt ratio)×ROE

Return on equity is used to measure the financial performance that owners of the common stock of a company receive on their shareholdings.

Return on equity=Net incomeEquity

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