If net income = $10,000, ROE = 20 percent, and stockholders' equity at the end of the year = $55,000, then which of the following is true?Multiple choice question.Average stockholders' equity = $65,000 and stockholders' equity at the beginning of the year = $40,000.Average stockholders' equity = $60,000 and stockholders' equity at the beginning of the year = $55,000.Average stockholders' equity = $50,000 and stockholders' equity at the beginning of the year = $45,000.Average stockholders' equity = $40,000 and stockholders' equity at the beginning of the year = $25,000.
Question
If net income = 55,000, then which of the following is true?Multiple choice question.Average stockholders' equity = 40,000.Average stockholders' equity = 55,000.Average stockholders' equity = 45,000.Average stockholders' equity = 25,000.
Solution
To answer this question, we first need to understand the formula for Return on Equity (ROE). The formula is:
ROE = Net Income / Average Stockholders' Equity
We know that the Net Income is $10,000 and the ROE is 20 percent or 0.20 in decimal form. We can plug these values into the formula and solve for Average Stockholders' Equity:
0.20 = $10,000 / Average Stockholders' Equity
Solving for Average Stockholders' Equity gives us $50,000.
Now, we know that the Average Stockholders' Equity is the average of the Stockholders' Equity at the beginning and end of the year. So, if the Stockholders' Equity at the end of the year is 50,000, then the Stockholders' Equity at the beginning of the year must have been $45,000.
So, the correct answer is: Average Stockholders' Equity = 45,000.
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