ROE ... How do you know...?

[Philly1616]

Given the following income statement and balance sheet for a company:

Balance Sheet

Assets Year 2003 Year 2004
Cash 200 450
Accounts Receivable 600 660
Inventory 500 550
Total CA 1300 1660
Plant, prop. equip 1000 1250
Total Assets 2600 3240

Liabilities
Accounts Payable 500 550
Long term debt 700 1102
Total liabilities 1200 1652

Equity
Common Stock 400 538
Retained Earnings 1000 1100
Total Liabilities & Equity 2600 3240


Income Statement

Sales 3000
Cost of Goods Sold (1000)
Gross Profit 2000
SG&A 500
Interest Expense 151
EBT 1349
Taxes (30%) 405
Net Income 944

Which of the following is closest to the company's return on equity (ROE)?

A) 0.292.


B) 1.833.


C) 0.576.


D) 0.752.



How doyou know if you should used End of Year or Average Equity..... OR if you should use Dupont or just Net Income/avg equity.....???

 

[FrankArabia]

i think the key to the question is "closest"...try out both and see which one suits the answers the best..........personally, i would use average.......

 

[FrankArabia]

btw, what is the right answer???i choose B

 

[Super I]

There's no real or correct answer there because the 2004 balance sheet doesn't balance.

Liabilites: 1652
CS 538
RE 1100

Total L+E= 3290 NOT the 3240 shown.

But if you take NI of 944 divided by the 1638 equity figure you get .576 which is answer C

Answer A uses a divisor of about 3240 (L+E) which is clearly wrong
Answer B uses a divisor of about 515 which is equally retarded
Answer D uses a divisor of about 1255 which is further from the 2 year average (1519) than the 2004 year end, so even if you were debating using the average vs. the ending you still get C.

 

[Philly1616]

Answer is C