Question

A firm's net income for the year was $800,000. Average assets totaled $6 million, and average liabilities totaled $1.2 million. Return on equity was:

1) 13.3%
2) 16.7%
3) 10%
4) 20%

Answer 1

The Return on Equity (ROE) for the firm is calculated by dividing the net income by the average shareholders' equity. The net income was $800,000, and after calculating the average shareholders' equity as $4,800,000, the ROE comes out to be 16.7%.

Step-by-step explanation:

The subject of the student's question involves calculating the Return on Equity (ROE). This is a financial performance metric that is used to measure a firm's profitability in relation to its shareholders' equity. To calculate the ROE, you need to divide the net income by the shareholders' equity. First, we calculate the average shareholders' equity using the average assets and average liabilities:

• Average shareholders' equity = Average assets - Average liabilities
• Average shareholders' equity = $6,000,000 - $1,200,000
• Average shareholders' equity = $4,800,000

Then, we compute the ROE:

• ROE = (Net Income / Average Shareholders' Equity) × 100
• ROE = ($800,000 / $4,800,000) × 100
• ROE = 16.67%

Therefore, the correct answer is 16.7%, which corresponds to option 2.