A firm has an roe of 3.5%, a debt-to-equity ratio of 1.1, a tax rate
The operating return on assets (ROA) is calculated by taking the net income after taxes divided by total average assets. In this scenario, the operating ROA can be calculated as follows:
ROA = (Net Income After Taxes ÷ Total Average Assets)
ROA = [(Net Income × (1 – Tax Rate)) ÷ [Average Total Assets – Average Short Term Debt + Average Long Term Debt]]
ROA = [(3.5% ROE × (1- 0.4)) ÷ {(1+ 1.1)(Average Assets)-Average Short Term Debt + x(1+0.06)}]
Therefore, the operating ROA is 3%.
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