[kdawg22]

Total stockholders’ equity
100,315,000 Year 2
86,500,000 Year 1

Net income
$13,815,000 Year 2
$24,400,000 Year 1

I came across this question under the NINJA sims and I am confused by it. I calculated: 13,815/ [(100,315+86,500)/2]= 14.79%. What is confusing me in the explanation for the correct answer (shown below) it is saying that the ratio is avg. common stockholders’ equity but only year 2 equity is taken into consideration. I remember from studying from FAR that anytime there is a ratio that has a income statement number and balance sheet number, that you need to take the avg. of the balance sheet number.

Correct Answer from NINJA:
Return on equity = Net income less preferred dividends ÷ Average common stockholders’ equity

Net income for Year 2 = $13,815,000
Stockholders’ equity for Year 2 = $100,315,000

$13,815,000 ÷ $100,315,000 = 13.77% for Year 2

[jc510]

Hey OP, were you looking at the SIMS on becker? I believe the question stated to ignore average and use year-end, or something along those lines.

[Namstut]

@kmk2260, I am studying for FAR right now and I had to go and check the book for ratios.

Return on common equity = (Net Income – Preferred Dividends)/AVERAGE Common Equity.

This formula assumes that there is preferred stock so you exclude dividends and use equity related to common stock only. I wouldn't think it would be any different if it was just equity. This is very confusing.

AUD 7/6/16 Passed
BEC 9/3/16
FAR TBD
REG TBD

[kdawg22]

@Namstut there weren't any dividends paid in this problem so it is okay to be using the Total stockholders' equity numbers $100,315,000 for Year 2 & $86,500,000 for Year 1

@jc510 It is from NINJA Sims questions #53. The problem says to “Use the data in Pacific Gourmet‘s financial statements to calculate for Year 2 the analytical ratios indicated in the table below to 2 decimal places. (For turnover ratios, year-end balances should be used. All calculations are based on a 365-day year.)”

The only problem with that is ROE is not a turnover ratio it is a profitability ratio.

[mschnei42]

Use the average unless explicitly told otherwise. I remember being frustrated about this, too 😛

AUD: 98
FAR: 95
REG: July 11, 2016
BEC: August 8, 2016

[Author]

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