The document calculates the operating return on assets (ROA) for a firm using specific financial ratios. With a return on equity (ROE) of 4%, a debt/equity ratio of 0.4, and a tax rate of 35%, the operating ROA is derived to be 5.83%. The calculation involves considerations of equity, debt, and earnings before interest and taxes (EBIT).

1. A firm has an ROE of 4%, a debt/equity ratio of 0.4, a tax rate of 35%, and pays an interest rate
of 5% on its debt. What is its operating ROA? (Do not round intermediate calculations. Round
your answer to 2 decimal places.)
Solution
Operating ROA is calculated just like Return on Assets but uses Earnings Before Interest and
Taxes (EBIT) instead on Net Income.
Debt equity ratio is 0.4 , so debt is 0.4/1.4 = 28.57% and equity is 1/1.4 = 71.43%.
ROA = ((% equity/% asset) × (ROE/(1-tax)) + ((%debt/%asset)* interest in debt))
=(1/1.4)×4%/0.65)) +((0.4/1.4)*5%))
= 4.4% +1.43% =5.83%