Question

Use the following information to answer this question.

Windswept, Inc. 2010 Income Statement ($ in millions)
Net sales $ 8,600
Less: Cost of goods sold 7,290
Less: Depreciation
400

Earnings before interest and taxes $ 910
Less: Interest paid
80

Taxable Income $ 830
Less: Taxes
291

Net income
$ 539

Windswept, Inc. 2009 and 2010 Balance Sheets ($ in millions)
2009

2010

2009

2010

Cash $ 140 $ 175 Accounts payable $ 1,150 $ 1,205
Accounts rec. 900 700 Long-term debt 990 1,255
Inventory
1,500

1,535

Common stock $ 3,190 $ 2,890
Total $ 2,540 $ 2,410 Retained earnings
450

700

Net fixed assets
3,240

3,640

Total assets
$ 5,780

$ 6,050

Total liab. & equity
$ 5,780

$ 6,050

What is the return on equity for 2010?

A. 15.01.

B. 18. 65

C. 17.73

D. 25.35

E. 31.49

Please show work for points.

Answer 1

15.01%

Step-by-step explanation:

The computation of the return on equity is shown below:

Return on equity = Net income ÷ Equity at the end of 2010 × 100

where,

Net income is $539

And, the equity at the end of 2010 is

= Common Stock + Retained Earnings

= $2,890 + $700

= $3,590

So, the return on equity is

= $539 ÷ $3,590 × 100

= 15.01%

We simply applied the above formula to determine the return on equity