U KNO, Inc. uses only debt and common equity funds to finance its assets. This past year the firm's return on total assets was 19%. The firm financed 25% percent of its assets using debt. What was the firm's return on common equity? (Round your answer to two decimal places and state it in percentage form.)

The return on equity is a measurement of the profit of a business in relation to equity. Because shareholder's equity can be computed by taking all assets and subtracting all liabilities, ROE can also be thought of as a return on assets minus liabilities.

Computation of the return on equity:

Return on total assets = 19%,

Debt percent to assets = 25%,

Total assets = 100%

Then, equity percent to assets:

[tex]\text{Assets-Debts} = \text{Equity percent to Assets}\\\\100\%-25\% = 75\%[/tex]

[tex]\text{Return on Total Assets} =\dfrac{\text{Net Income}}{\text{Total Assets}}\\\\19\% =\dfrac{\text{Net Income}}{\text{100\%}}\\\\0.19\times1.00= {\text{Net Income}[/tex]

Then, return on equity:

[tex]\text{Return on Equity} = \dfrac{\text{Net Income}}{Equity}}\\\\\\\text{Return on Equity} = \dfrac{\text{0.19}}{75\%}}\\\\\\\text{Return on Equity} =0.2533\\\\\\\text{Return on Equity} =0.2533\times100\\\\\\\text{Return on Equity} =25.33\%[/tex]

Therefore, In U KNO, Inc., the return on common equity would be 25.33%

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