A fire has destroyed a large percentage of the financial records of the Inferno

Question

A fire has destroyed a large percentage of the financial records of the Inferno Company. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 14.9 percent. Sales were $1,750,000, the total debt ratio was .32, and total debt was $651,000. Required: What are the total assets? (Do not round intermediate calculations.) Total assets $ What is the total equity? (Do not round intermediate calculations. Round your answer to the nearest whole number (e.g., 32).) Total equity $ What is the net income? (Do not round intermediate calculations. Round your answer to the nearest whole number (e.g., 32).) Net income $ What is the return on assets (ROA)? (Round your answer as directed, but do not use the rounded numbers in intermediate calculations. Enter your answser as a percent rounded to 2 decimal places (e.g., 32.16).) Return on assets %

Explanation / Answer

Total Debt Ratio (Given)= Total Debts (Given) ÷Total Assets

0.32 = $651,000 ÷ Total Assets

Total Assets = $651,000 ÷ 0.32 = $2,034,375 .........(i)

Total Assets (From equation i) = Total Debts (Given) + Total Equity

$2,034,375 = $651,000 + Total Equity

Total Equity = $1,383,375 ....................(ii)

Return on Equity (Given) = Net Income ÷ Total Equity (From equation ii)

14.9% = Net Income ÷ $1,383,375

Net Income = $1,383,375 X 14.9% = $206,123 (rounded off to the nearest whole number)

Equity multiplier = 1/ (1 – Total Debt Ratio (Given)) = 1/ (1 - 0.32) = 1/0.68 = 1.47

ROE (Given) = Return on Assets (ROA) X Equity multiplier.

14.9% = (ROA) (1.47)

ROA = 10.14%

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