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? 
I can't wait until this class is over in about 5 more weeks! lol
Thanks in advance for any help.
Evans
Hey, Wynter. The key to this problem is remembering that equity is assets minus liabilities. Let me pour a cup of coffee and look over the problem and I'll see if I can help more.
1i am glad jen is helping. i am a total knucklehead on stuff like this.
2Ok, I've got it. Do you want me to just lay it out, or do you want me to play tutor and help you figure it out?
3Hey Aud! Nothing like accounting first thing in the morning.
4yeah and i haven't had my coffee. numbers + early morning - coffee=knucklead
(that is the best math i can do this early in the morning and really ever
)
5Oh, I just noticed you're not online. Ok, I'm going to put some hints in my comment here, and I'll PM you the whole answer. Be a good girl and try to work it out before you check the PM.
a.) If it helps you, you can put these into numbers. For example, if ROA is 12% then you can substitute 12 for net income and 100 for total assets. If D/TA is 40%, then you can call debt 40 and TA is still 100. Like you said, ROE is NI/SE, so you already know NI and you can figure out equity using the debt and total assets - both of which you already know.
b.) Remember that equity is assets less liabilities, so if the company has no liabilities then ROE must be....what?
Ok, off to PM.
6
Aud! That's pretty good!! 
7i also am apparently having a hard time with both math and keyboarding.
8
@ knucklead. That's my new insult-du-jour. 
What a knucklead. 
9Glad Jen can help. Any type of math I just go blank. I made a C in college algebra. I can't even help Ethan anymore now that he has started algebra because I don't remember any of it
Thank goodness I am married to an engineer 
10If no one had helped you I was going to get him too
they have already started geometry basics and my son is in the third grade.
my hubby and i
are both knuckleads at math. 
11Hate math! Good thing Jen is here to help, even though her comment explaining the problem gave me a huge headache. lol
12CRAP! I just hit Post &Subscribe! and I just wanted to post! Grrr!
13hehe...I'm awful at math too. This class hasn't been too fun.
Thanks Jen. I'll try and work my way through it! I was busy packing for hubby and getting some sleep (I was up all night working on my homework and then MIL called so I've been looking for flights ever since). I didn't even get to fall asleep until almost 7 this morning.
14I am impressed! I am good at math but accounting can be sooo confusing - I don't even do my own taxes.
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