A firm has sales of $1,750,000, pretax income of $545,000, a tax rate of 35%, assets of $7,500,000, and total liabilities of $3,000,000. Calculate the firm’s ROE using the quality of earnings approach.
What will be an ideal response?
Since Assets = Liabilities + Equity: 7,500,000 = 3,000,000 + Equity; therefore, Equity = 4,500,000
(545,000/1,750,000) * (1,750,000/7,500,000) * (7,500,000/4,500,000) * (1-.35) = .0787 = 7.87%
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What will be an ideal response?