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Mongiamo's, Inc. earned Net Income (after tax) of $330,000. It's shareholder's equity consisted of the following:...

Mongiamo's, Inc. earned Net Income (after tax) of $330,000. It's shareholder's equity consisted of the following: Common stock $500,000. Retained earnings $250,000. Preferred Stock $50,000. Treasury Stock $25,000. What is the company's ROE?

a) 41.2%

b) 42.5%

c) 40%

d) 66.6%
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Answer #1

Formula to find Return on Equity:

Now what is shareholder's equity.

The reason to subtract Treasury stock is that, it is a company's own common stock which has been reacquired.

So substituting the values, we get shareholder's equity as:

Again substituting the value of shareholder's equity in the formula of ROE, we get:

or

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