Explanation:
The firm’s leverage =
ROE = (ROA × Leverage ratio) − [(Leverage ratio − 1) × cost of debt]
= or $20.5%$
Q.3877 ABC Ltd. is a US-based food processing firm. The firm has a ROA of 10%, total assets equal to $5, equity capital equal to $2. The firm’s cost of debt is 3%. Calculate the firm’s ROE.
A
19.8
B
20.1
C
20.5
D
21.2
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