You are considering investing in Lenny\'s Lederhosen, Inc. You have been able to

Question

You are considering investing in Lenny's Lederhosen, Inc. You have been able to locate the following information on the firm: total assets = $20 million, accounts receivable = $6 million, ACP = 20 days, net income = $5 million, and debt-to-equity ratio = 2.5 times. What is the ROE for the firm? You are considering investing in Lenny's Lederhosen, Inc. You have been able to locate the following information on the firm: total assets = $20 million, accounts receivable = $6 million, ACP = 20 days, net income = $5 million, and debt-to-equity ratio = 2.5 times. What is the ROE for the firm?

Explanation / Answer

ROE = Net Income / Shareholders equity

Net Income = $ 5 million

Equity can be determined with the help of the debt equity ratio

D:E = 2.5:1

Proportion of equity = 1/(2.5+1) = 0.2857

Assets = Liabilities

Total Assets = $20 mn

Total Liabilities = $ 20 mn

Proportion of equity = 0.2857

Equity = $20x0.2857 = $5.71 mn

ROE = $5mn / $5.71 mn

ROE = 0.875 or 87.5%

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