For the current year,Company A had sales of $300,000,net income of $200,000 and average common Stockholders' Equity of $900,000.During the same year,Company B had sales of $200,000,net income of $100,000 and average common Stockholders' Equity of $400,000.Which of the following statements is TRUE regarding this situation?

Question

Quizplus · Accepted Answer

Return on Equity (ROE) is calculated by dividing net income by average common Stockholders' Equity. 
For Company A, ROE = $200,000/$900,000 = 22.22%
For Company B, ROE = $100,000/$400,000 = 25%
Therefore, choice B is correct - Company B has a better return on equity, 25% compared to Company A's 22.22%.

For the Current Year,Company a Had Sales of $300,000,net Income