The information below was extracted from the most recent financial statements of Milton Technologies (in millions, except for stock price) : Prior Year Current Year Total Assets $ 347,000 $ 411,000 Total Liabilities 112,000 166,000 Net Income 65,000 89,000 Common shares outstanding 30,000 35,000 Market price of common stock $ 38.00 $ 42.00 What is the company's return on equity (ROE) for the current year?

The answer is 37.1%

Explanation:

The return on equity is a measure of how profitable a business is in relation to its equity.

The Return on equity is:

Net income : Average Shareholders' equity

Stockholders' equity = Total Assets - Total Liabilities

Beginning shareholders' equity = $347,000 - $112,000 = $235,000

Ending shareholders' equity = $411,000 - $166,000 = $245,000

Average Shareholders'equity =

($235,000 + $245,000) : 2

= $240,000

Using the Return on Equity formula:

$89,000 : $240,000

= 0.371

= 37.1%

37.1%

Explanation:

Return on Equity is the times of profit a owner can earn on the equity investment in the business. Higher ratio shows the business is more profitable.

Formula

Return on Equity (ROE) = Net Income / Average Equity

As per given Data

Prior Year Current Year

Total Assets $347,000 $411,000

Total Liabilities $112,000 $166,000

Net Income $65,000 $89,000

Common shares outstanding $30,000 $35,000

Market price common stock $38.00 $42.00

As we know

Assets = Equity + Liability

As we have assets and liabilities value placing current year data in the formula

$411,000 = Equity + $166,000

Beginning Equity = $347,000 - $112,000 = $235,000

Ending Equity = $411,000 - $166,000 = $245,000

Average Equity = ($235,000 + $245,000) / 2 = $240,000

Placing values in the formula of return on equity (ROE)

Return on equity = $89,000 / $240,000 = 0.371 = 37.1%