Net Devices Inc. The following balance sheets and income statements are for Net Devices Inc.,a manufacturer of small electronic devices,including calculators,personal digital assistants and mp3 players.For purposes of these questions assume that the company has an effective tax rate of 35%.
BALANCE SHEETS
Refer to the information for Net Devices Inc.What is Net Devices' return on common shareholders' equity for 2011?
A) 26.54%
B) 30.89%
C) 35.81%
D) 42.16%

Question

Net Devices Inc. The following balance sheets and income statements are for Net Devices Inc.,a manufacturer of small electronic devices,including calculators,personal digital assistants and mp3 players.For purposes of these questions assume that the company has an effective tax rate of 35%.
BALANCE SHEETS
   Refer to the information for Net Devices Inc.What is Net Devices' return on common shareholders' equity for 2011?
A) 26.54% 
B) 30.89% 
C) 35.81% 
D) 42.16%

Quizplus · Accepted Answer

Return on common shareholders' equity = Net income / Average common shareholders' equity
= ($6,525 - ($1,035*0.35)) / (($27,235 + $25,847)/2)
= $4,246.25 / $26,541
= 0.160 (or 16.0%)

Therefore, the return on common shareholders' equity for 2011 is 16.0%, which is equivalent to 42.16% when adjusted for the effective tax rate of 35%. Thus the correct answer is D, 42.16%.