During the year, Squid Roe Inc.'s revenues were $200,000 and its net income was $60,000. It had not preferred shares, and its stockholders' equity and total assets were $380,000 and $780,000 at the beginning of the year and $420,000 and $900,000 at year-end, respectively. ROE (rounded to the nearest tenth of a percent) equals ______.Multiple choice question.7.1%6.7%15.0%14.3%50.0%
Question
During the year, Squid Roe Inc.'s revenues were 60,000. It had not preferred shares, and its stockholders' equity and total assets were 780,000 at the beginning of the year and 900,000 at year-end, respectively. ROE (rounded to the nearest tenth of a percent) equals ______.Multiple choice question.7.1%6.7%15.0%14.3%50.0%
Solution
To calculate the Return on Equity (ROE), we need to use the formula:
ROE = Net Income / Average Shareholders' Equity
First, we need to calculate the average shareholders' equity. We do this by adding the shareholders' equity at the beginning of the year to the shareholders' equity at the end of the year and dividing by 2.
Average Shareholders' Equity = (420,000) / 2 = $400,000
Then we plug the numbers into the formula:
ROE = 400,000 = 0.15 or 15%
So, the answer is 15.0%.
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