I can’t seem to figure this one out (from Schweser book 6). The following data pertains to a company’s common-sized financial statements. Current assets = 40% Total debt = 40% Net income = 16% Total assets = 2,000 Sales = 1,500 Total asset turnover ratio 0.75 No preferred stock in capital structure. The company’s after tax return on common equity is: A. 15% B. 16% C. 20% D. 25% Also, I don’t know if anyone can help but I only have the answers (without explanations) for Book 6, which is making reviewing my mistakes very hard! Thanks.
C? NI = 16% * 1500 = 240 Equity = TA - TL =2000 - 800= 1200 240/1200 = 0.2
Got TL by taking 2000 * 40%(total debt)
Total Assets = 2000 = (Total Liabilities + Common Equity) total Debt = 40% so Debt = 40% * 2000 = 800 So Equity = 1200 NI = 16% * 1500 (Common size statement on Income statement is based on Net Sales). So NI = 240 240/1200 = 20% Choice C
D… 240 of the 1200 is net income… not common equity 240 / (1200-240) = .25
C. CPK is right as always apcarlso, I don’t think net income appears on balance sheets…
apcarlso- The Net Income is added to retained earnings, which is considered common equity. I have yet to see a question asked in this way where the Net Income is not included in the common equity. Someone please tell me if I am wrong. Thanks.
yep finance03…you have explained what I was trying to say perfectly.=)
C as well you can do it as cpk or sales/assets=0.75 net income/ sales=16% equity multiplier=1/0.6=1.67 just multiply them and you get the same answer
in which exam of Schweser book 6 was this question on? Thanks CP
For (Common Sized) Balance Sheets we always use Total Assets TA = 2000 TL = 40% * TA TL = 0.40*2000 = 800 TE = TA - TL = 2000 - 800 TE = 1200 ROE = NI/TE For (Common Sized) Income Statements we always use Sales figure NI = 16% * Sales NI = 0.16*1,500 = 240 ROE = 240/1200 = 0.2 = 20% = C Now that’s an easy one… - Dinesh S
If RE is in common equity, then I agree with C. Thanks for the heads up Finance03.
C: 16%*1,500/(60%*2000)=20%
In many of the Cash flow questions Change in Retained Earnings is provided, Dividend paid is provided and you are expected to calculate New Common Stock issued. So RE Before + NI - Dividend + Common Stock issued = RE After.
cpk123, could you put an example?
The example that I solved this morning for konstantin… is one such one. konstantin has KINDLY bumped the message just now… for everyone to see.
C is correct. I spaced out on the fact that common sized meant that 40% was 40% of either assets or liab + equity. Thanks everyone. I’m sure I’ll have more questions to post soon! 
Oh and its Q53, book 6, morning session 1
cpk123, it’s not retained earnings account, it’s common equity account which consists of common stocks and retained earnings.
sorry, my bad.