US CMA Part 2 · Chapter 2 · Question 4 of 15
Orchard Holdings has a return on equity of 15% and a return on assets of 6%, both based on the same net income and year-end balances. What is its ratio of total liabilities to total assets?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) 60%
Explanation
Equity multiplier = ROE / ROA = 15% / 6% = 2.5, so total assets are 2.5 times equity and equity / assets = 1 / 2.5 = 40%. Total liabilities / total assets = 1 - 40% = 60%. 40% is the equity ratio, and 150% is the debt-to-equity ratio, not the debt-to-assets ratio.
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