Question

Thomas Company had income before interest and taxes of $127,000. Interest expense for the period was $17,700 and income taxes amounted to $29,200. The average stockholders' equity was $687,000. Thomas' return on equity (ROE) is closest to:

A 15.91%.
B 18.49%.
C 14.24%.
D 11.66%.

Answer 1

The calculation of Thomas Company's return on equity (ROE) is performed by subtracting interest expense and taxes from income before interest and taxes to obtain net income, and then dividing this net income by the average stockholders' equity. The ROE is found to be 11.66%, which corresponds to option D.

Step-by-step explanation:

The question is asking for the calculation of the return on equity (ROE) for Thomas Company. To calculate ROE, we need to determine the net income by subtracting both interest expense and taxes from the income before interest and taxes. Then, we divide the net income by the average stockholders' equity and multiply by 100 to get the percentage.

Here's the calculation:

1. Net Income = Income before interest and taxes - Interest expense - Income taxes
   = $127,000 - $17,700 - $29,200
   = $80,100
2. Return on Equity (ROE) = (Net Income / Average Stockholders' Equity) × 100
   = ($80,100 / $687,000) × 100
   = 11.66%

Therefore, the closest option to Thomas' ROE is 11.66%, which is option D.

We provide correct option in final answer.