Multiple Choice
Given two companies with identical net income but different equity levels, which of the following statements about their Return on Equity (ROE) is correct?
21
views
14. Financial Statement Analysis
Ratios: Return on Equity (ROE)
Struggling with Financial Accounting?
Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
A company has income before taxes of $100,000. Net sales are $400,000 and gross profit is $300,000. What is the ROE, assuming the company has a 40% tax rate, and average common equity was $900,000?
A
6.7%
B
11.1%
C
33.3%
D
44.4%
Verified step by step guidance1
Calculate the tax expense by multiplying the income before taxes ($100,000) by the tax rate (40%).
Subtract the tax expense from the income before taxes to determine the net income.
Understand that Return on Equity (ROE) is calculated using the formula: \( ROE = \frac{\text{Net Income}}{\text{Average Common Equity}} \times 100 \).
Substitute the net income and average common equity ($900,000) into the ROE formula.
Calculate the ROE percentage by performing the division and then multiplying by 100 to convert it to a percentage.
4:58mWatch next
Master Ratios: Return on Equity (ROE) with a bite sized video explanation from Brian
Start learningRelated Videos
Related Practice
Ratios: Return on Equity (ROE) practice set
Problem sets built by lead tutorsExpert video explanations