Question

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 = $63 million, total debt = $23 million, debt ratio = 47%, ROE = 12.3%. Using this information, what is PJ's ROA? (Do not round intermediate steps.

Answer 1

Answer:

The return on assets = 6.53%

Explanation:

Since the debt ratio is 0.47 and the total debt value is $23 million By applying the debt equity formula we can find out the total debt value which is shown below:

Debt ratio = (Total debt ÷ Total assets)

0.47 = ($23 million ÷ Total assets)

So, the total assets = $23 million ÷ 0.47 = $48.94 million

And, the total assets would be equal to

= Total debt + total equity

$48.94 million = $23 million + total equity

So, total equity = $48.94 million - $23 million = $25.94 million

The return on equity is 12.3%. So, here we apply the return on equity formula which is shown below:

Return on equity = (Net income) ÷ (total equity)

12.3% = Net income ÷ $26 million

So, the net income would be $3.198 million

And, Return on assets = (Net income) ÷ (total assets)

= $3.198 million  ÷ $48.94 million

Hence, the return on assets = 6.53%