Exercise 1311 Financial Ratios for Assessing Profitability a

Exercise 13-11 Financial Ratios for Assessing Profitability and Managing Debt [LO13-4, LO13-5]

Selected financial data from the June 30 year-end statements of Safford Company are given below:

     Total assets at the beginning of the year were $5,400,000; total stockholders’ equity was $1,900,000. The company’s tax rate is 35%.

Compute the return on equity. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

Solution

Ans ) Return on equity = Net income / Average shareholders equity

Average shareholders equity = (Opening shareholders equity + Closing shareholders equity)/2

= ($1,900,000+$2,100,000)/2

= $2,000,000

Return on equity = $370,000/$2,000,000

= 18.5%