A company has net income of $5.6 million.Stockholders' equity at the beginning of the year is $32.55 million and,at the end of the year,it is $38.15 million.The only change to stockholders' equity came from net income.The return on equity ratio is approximately:
A) 0.15.
B) 0.16.
C) 0.87.
D) 6.64.

Question

Quizplus · Accepted Answer

Return on equity (ROE) is calculated as net income divided by average stockholders' equity.

Average stockholders' equity is calculated as:

(Beginning stockholders' equity + Ending stockholders' equity) / 2

= ($32.55 million + $38.15 million) / 2

= $35.35 million

ROE = Net income / Average stockholders' equity

= $5.6 million / $35.35 million

= 0.1587

≈ 0.16

Therefore, the correct answer is (B) 0.16.

A Company Has Net Income of $5