Multiple Choice
Which of the following changes in the Return on Assets (ROA) ratio generally provides good news about a company?
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14. Financial Statement Analysis
Ratios: Return on Assets (ROA)
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A firm has a Return on Assets (ROA) of 12\% and a Return on Equity (ROE) of 52\%. What is the firm's equity multiplier?
A
4.33
B
0.23
C
2.50
D
6.25
Verified step by step guidance1
Understand the relationship between Return on Assets (ROA), Return on Equity (ROE), and the Equity Multiplier. The formula to calculate the Equity Multiplier is: \( \text{Equity Multiplier} = \frac{\text{ROE}}{\text{ROA}} \).
Identify the given values in the problem: ROA = 12\% (or 0.12) and ROE = 52\% (or 0.52).
Substitute the given values into the formula: \( \text{Equity Multiplier} = \frac{0.52}{0.12} \).
Perform the division operation to calculate the Equity Multiplier. This step involves dividing ROE by ROA.
Compare the calculated Equity Multiplier to the provided answer choices (4.33, 0.23, 2.50, 6.25) to determine the correct option.
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