Anderson Cable wishes to calculate its return on assets. You know that the return on equity is 12% and that the debt ratio is 40%. What is the return on assets?

Answer (B) is correct. The entire income accrues to the equity holders. If total assets equal $100, then equity must be 60% of that, or $60. A 12% return on $60 would be $7.20. Return on assets is calculated using the following formula: Return on assets = Return on equity × (1 – Debt ratio) For Anderson Cable, the calculation is 12% × 60% = 7.2%