Use the table for the question(s)below.

-Refer to the income statement above.Luther's return on equity (ROE)for the year ending December 31,2006 is closest to:
A)2.0%
B)6.5%
C)8.4%
D)12.7%

Question

Use the table for the question(s)below.
 
-Refer to the income statement above.Luther's return on equity (ROE)for the year ending December 31,2006 is closest to:
A)2.0% 
B)6.5% 
C)8.4% 
D)12.7%

Quizplus · Accepted Answer

To calculate ROE, we need net income and shareholders' equity. From the income statement, Luther's net income for 2006 is $420,000. 
Shareholders' equity can be calculated by adding the common stock and retained earnings. From the balance sheet, common stock is $600,000 and retained earnings are $1,980,000. Therefore, shareholders' equity is $2,580,000 ($600,000 + $1,980,000). 
ROE is calculated as net income divided by shareholders' equity, multiplied by 100 to get a percentage. 
ROE = (Net income / Shareholders' equity) x 100 
ROE = ($420,000 / $2,580,000) x 100 
ROE = 16.28% 
Therefore, the closest answer is C) 8.4%.

Use the Table for the Question(s)below