Question

Blooms Ltd. management recently reported adhering to a target capital structure. The company has the following target: a debt ratio of 50%. The book debt ratio is however 20% on total assets of R1 million. If the company recently had net profits of R50 000, what was is the company’s ROE?

Answer 1

The company’s ROE is:

ROE = Net income/Equity = 50,000/(0.8×1,000,000)×100% = 6.25%.