Question

Mike Smith has the following financial data: Investment asset at year end $465,000 Investment asset at...

Mike Smith has the following financial data:

Investment asset at year end $465,000

Investment asset at beginning of the year $392,000

Savings made during the year by Mike $25,000

Employer match to Mike’s 401(k) plan $5,000

Total assets on ending statement of financial position $680,000

Gross income on income statement $110,000

Total assets on beginning statement of financial position $610,000

Total liabilities at beginning of year $200,000 Total liabilities at year end $185,000

a. What is Mike’s ROI for the year?

b. What is Mike’s ROA for last year?

c. What was Mike’s return on net worth for the year?

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Answer #1

a. ROI = (Investment at the end - Investment at the beginning)/Investment at the beginning

Therefore,

ROI= (465000-392000)/392000= 18.62%

b. ROA = (Assets at the end - Assets at the beginning)/Assets at the beginning

Therefore,

ROA=(680000-610000)/610000 = 11.48%

c. Shareholders Equity= Total assets- Liabilities

At the end,

Shareholders Equity= 680000-465000= 215000

Return on Net Worth= Net Income/ Shareholders Equity

Net Income= Gross Income - Employer Match plan+savings = 110000-5000+25000= 130000

Therefore,

Return on Net Worth = 130000/215000= 60.46%

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