QUESTION 26 The financial statements of Tennessee Tractor Company are given belo

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QUESTION 26 The financial statements of Tennessee Tractor Company are given below Tennessee Tractor Company Income Statement (2007) Sales Cost of goods sold Gross profit Selling and administrative expenses Operating profit Interest expenses Income before tax Tax expense Net income $8,000,000 5,260,000 2,740,000 1.500,000 1,240,000 140,000 1,100,000 440,000 S660,000 Balance Sheet Cash Accounts receivable Inventory Total current assets Fixed assets Total assets 2007 S 200,000 1,200,000 1,840,000 3.240,000 3,200,000 $6,440,000 Accounts payable Bank loan Total current liabilities Bonds payable Total liabilities Common stock(130,000 shares) Retained earnings Total liabilities & equity 800,000 600,000 1.400,000 900,000 2.300,000 300,000 3,840,000 $6,440,000 market for $40 each The firm's net return on equity ratio for 2007 is 0.24% 1.63% 4.00% 15.94% 16.9% QUESTION 27

Explanation / Answer

ROE (Return on Equity) = PAT/ Shareholder's Equity

Share Holder's Equity = Common Equity + Retained Earnings = 300,000 +3840,000 = 4140,000

PAT = Net Income = 660,000

ROE = 660,000 /(300,000+3840,000) = 15.94%

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