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Net income is $248,000, interest expense is $55,000, and average total assets are $3,778,000. What is the return on total assets (to one decimal percent)?
A5.1%
B6.6%
C9.5%
D8.0%
Answer & Solution
Correct answer: D. 8.0%
1. Ratio = (net income + interest expense) / average total assets.
2. Interest is added back because how assets are financed should be irrelevant.
3. = ($248,000 + $55,000) / $3,778,000 = $303,000 / $3,778,000.
4. = 0.080 = 8.0%.
5. Trap: 6.6% (option B) omits the interest add-back in the numerator.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §7.3.4 "Return on Total Assets", p.305_
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