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Q.3878 ABC Ltd. is a US-based food processing firm. The firm has a ROA of 10%, total assets equal to $7, equity capital equal to $2. The firm’s cost of debt is 5%. Calculate the firm’s ROE. | Financial Risk Manager Part 2 Quiz - LeetQuiz

Explanation:

Leverage ratio = $\frac{7}{2} = 3.5$

ROE = (ROA × Leverage ratio) − [(Leverage ratio − 1) × cost of debt]
= $(0.10 \times 3.5) − [(3.5 − 1) \times 0.05]$ = $0.225 $or `$ 22.5`%$

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Q.3878 ABC Ltd. is a US-based food processing firm. The firm has a ROA of 10%, total assets equal to `$7`, equity capital equal to `$2`. The firm’s cost of debt is 5%. Calculate the firm’s ROE.