PFL Co has sales of 500,000, operating profit of 50,000, interest expense of 10,000, tax expense of 20,000, total equity of 125,000 and total debt of 275,000. Their return on equity is:Select one:a.16%b.10%c.12%d.18%
Question
PFL Co has sales of 500,000, operating profit of 50,000, interest expense of 10,000, tax expense of 20,000, total equity of 125,000 and total debt of 275,000. Their return on equity is:Select one:a.16%b.10%c.12%d.18%
Solution
The return on equity (ROE) is calculated by dividing the net income by the total equity.
First, we need to calculate the net income.
Net income is calculated by subtracting the interest expense and tax expense from the operating profit.
Operating profit = 10,000 Tax expense = $20,000
Net income = Operating profit - Interest expense - Tax expense Net income = 10,000 - 20,000
Total equity = $125,000
Now, we can calculate the ROE:
ROE = (Net income / Total equity) * 100 ROE = (125,000) * 100 ROE = 16%
So, the answer is a. 16%.
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