Profitability Ratios PJ's Ice Cream Parlor has asked you to help piece together financial information on the firm for the most current year.Managers give you the following information: sales = $50 million,total debt = $20 million,debt ratio = 50 percent,and ROE = 12 percent.Using this information,what is PJ's ROA?
A)4 percent
B)6 percent
C)10 percent
D)12 percent

Question

Quizplus · Accepted Answer

ROA = Net Income/Total Assets

Since we are not given the net income, we cannot directly calculate the ROA. However, we can use the given information to find Total Assets.

Total Debt = 50% of Total Assets
Total Assets = Total Debt / 50% = $20 million / 50% = $40 million

ROE = Net Income / Equity
ROE = Net Income / (Total Assets - Total Debt)
12% = Net Income / ($40 million - $20 million)

Net Income = $2.4 million

ROA = Net Income / Total Assets
ROA = $2.4 million / $40 million
ROA = 6%

Therefore, the answer is B.

Profitability Ratios PJ's Ice Cream Parlor Has Asked You to Help