Question

A firm's net income for the year was $800,000. average assets totaled $6 million, and average liabilities totaled $1.2 million. return on equity was:

Answer 1

Return on equity is $800,000 / ($6,000,000 - $1,200,000 = 16.67%. Return on equity is net income divided by equity. We are given net income, but not equity. Equity is equal to average assets LESS average liabilities. Solving through will yield the equation as seen above. This question requires a finance background.