Corbin,Inc.had net income of $150,000 on sales of $5,000,000 during 2014 In addition,the firm's total assets were $2,500,000,and its capital structure is comprised of 40% debt and 60% equity.What was Corbin's return on equity in 2014?
A)15%
B)2.5%
C)10%
D)Return on equity cannot be determined with the information provided.

Question

Quizplus · Accepted Answer

Return on Equity = Net Income/Total Equity
Total Equity = Total Assets - Total Debt
Total Debt = 40% of Total Assets
Total Equity = 60% of Total Assets
Total Equity = 0.6 x $2,500,000 = $1,500,000
Total Debt = 0.4 x $2,500,000 = $1,000,000
Net Income = $150,000
Return on Equity = $150,000/$1,500,000 = 0.10 or 10%. Therefore, the correct answer is C.