What is the expected return on equity for a firm with a 14% expected return on assets that pays 9% on its debt,which totals 30% of assets?
A) 16.14%
B) 17.00%
C) 19.00%
D) 25.67%

Question

Quizplus · Accepted Answer

The expected return on equity (ROE) can be calculated using the formula: ROE = Return on Assets + (Return on Assets - Cost of Debt) * (Debt/Equity). Given that Debt/Assets is 30%, Equity/Assets is 70%, so Debt/Equity is 30/70. Plugging in the values: ROE = 14% + (14% - 9%) * (30/70) = 16.14%.

What Is the Expected Return on Equity for a Firm