Use the following information to answer this question. Windswept, Inc. 2017 Inco

Question

Use the following information to answer this question. Windswept, Inc. 2017 Income Statement $ In millions) Net sales Cost of goods sold Depreclation Earnings before interest and taxes Interest paid Taxable Income Taxes Net income $ 9,300 7,600 435 $ 1,265 94 $1,171 410 $ 761 Windswept, Inc. 2016 and 2017 Balance Sheets $ in millions) 2016 $210 $ 245 Accounts payable 2017 2016 2017 Cash Accounts rec. Inventory Total Net fixed assets Total assets $ 1,460 $ 1,550 1,325 3,220 2,960 770 870 Long-term debt 1,640 Common stock 1,000 970 1,640 $2,820 2,755 Retained earnings 520 3,380 3,850 6,200 6,605 Total liab. & equity 6,200 6,605 What is the return on equity for 2017?

Explanation / Answer

Return on Equity = Net Income/Average Shareholders' Equity

In 2017, Shareholders' Equity = $2,960 + $770 = $3730

In 2016, Shareholders' Equity = $3,220 + $520 = $3740

Average Shareholders' Equity = (3730 + 3740)/2 = $3,735

Net Income = 761

ROE = 761/3,735 = 19.57% --> Answer

In some text, ROE is mentioned as Net Income/Shareholders' Equity which is not entirely correct. In real world, Average Shareholders' Equity is used. If we used this formula, ROE = 19.59%

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