The Johnson's Company had net income(after tax) = 500,000 USD, Johnson's Company's income statement included Income...
The Johnson's Company had net income(after tax) = 500,000 USD, Johnson's Company's income statement included Income Tax Expense = 150,000 USD; Interest Expense = 50,000 USD. Also we know that at the beginning of the year the Johnson's Company's stockholders equity = 2,200,000 USD and at the end of this year stockholders equity = 2,800,000 USD. What is the after-tax return on stockholders equity for the Johnson's Company for this year?
Homework Answers
Solution :
The formula for calculating after tax return on stock holders equity is
= Net Income after tax / Average stock holders equity
As per the information given in the question we have
Net Income after tax = 500,000 USD
Stockholders equity at the beginning of the year = 2,200,000 USD
Stockholders equity at the end of this year = 2,800,000 USD
We know that Average stock holders equity = (Stockholders equity at the beginning of the year + Stockholders equity at the end of this year ) / 2
Applying the available information in the formula we have
Average stock holders equity = ( 2,200,000 USD + 2,800,000 USD ) / 2
= USD 5,000,000 / 2
= USD 2,500,000
The Average stock holders equity = USD 2,500,000
Thus the after tax return on stock holders equity is = Net Income after tax / Average stock holders equity
= USD 5,000,000 / USD 2,500,000
= 0.20
= 20 %
Thus the after-tax return on stockholders equity for the Johnson's Company for this year = 20 %
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