Question

If a company has average total assets of $2,500,000, average total common stock of $120,000, average total stockholders' equity of $1,600,000, sales of $4,500,000, and net income of $230,000, what is its return on equity ratio?

Answer 1

The return on equity (ROE) ratio for the company is calculated to be 14.375%, which is determined by dividing the net income of $230,000 by the average total stockholders' equity of $1,600,000.

Step-by-step explanation:

The question asks for the calculation of the return on equity (ROE) ratio, which measures a company's profitability by revealing how much profit a company generates with the money shareholders have invested. The ROE is calculated by taking the net income and dividing it by the average total stockholders' equity. In this case, the formula would be ROE = Net Income / Average Total Stockholders' Equity.

Given the net income of $230,000 and the average total stockholders' equity of $1,600,000, the calculation is as follows:

ROE = $230,000 / $1,600,000 = 0.14375 or 14.375%

Thus, the return on equity ratio for the company is 14.375%.