Windswept, Inc. 2017 Income Statement ($ in millions) Net sales $ 8,700 Cost of goods sold...

Windswept, Inc. 2017 Income Statement ($ in millions)
Net sales	$	8,700
Cost of goods sold		7,340
Depreciation		405
Earnings before interest and taxes	$	955
Interest paid		82
Taxable income	$	873
Taxes		306
Net income	$	567

Windswept, Inc. 2016 and 2017 Balance Sheets ($ in millions)
		2016		2017			2016		2017
Cash	$	150	$	185	Accounts payable	$	1,180	$	1,260
Accounts rec.		920		730	Long-term debt		1,000		1,265
Inventory		1,520		1,550	Common stock		3,210		2,900
Total	$	2,590	$	2,465	Retained earnings		460		710
Net fixed assets		3,260		3,670
Total assets	$	5,850	$	6,135	Total liab. & equity	$	5,850	$	6,135

What is the return on equity for 2017?

Solutions

Expert Solution

Return on equity can be calculated by either using the stockholders equity for 2017 or by considering the average stockholder equity. Both methods are correct and it depends what the instructor prefers

Using stockholder equity for 2017:

= Net income / Stockholder equity for 2017

= 567 / (2900 + 710)

= 15.70%

Using average stockholder equity

Average stockholder equity = ((3210 + 460) + (2900 + 710))/2

= 3640

ROE = 567/ 3640

= 15.58%

jeff jeffy answered 1 year ago

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