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?
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14. Financial Statement Analysis
Ratios: Return on Equity (ROE)
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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.
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