hi, I dont understand this one: why do we add to Net Income post-tax effect of non-recurring gain for firm A, but substract it for firm B ? for A: NI= 3.2+ .300(.64)- .400(.64) for B: NI= 16-2.6(.64) Question 26 - #87553 An analyst finds return-on-equity (ROE) a good measure of management performance and wants to compare two firms: Firm A and Firm B. Firm A reports net income of $3.2 million and has a ROE of 18. Firm B reports income of $16 million and has an ROE of 16. A review of the notes to the financial statements for Firm A, shows that the earnings include a loss from smelting operations of $400,000 and that the firm has exited this business. In addition, the firm sold the smelting equipment and had a gain on the sale of $300,000. A similar review of the notes for Firm B discloses that the $16 million in net income includes $2.6 million gain on the sale of no longer needed office property. Assume that the tax rate for both firms is 36%, and that the notes describe pre-tax amounts. What would be the “normalized” ROE for Firm A and for Firm B, respectively? A) 17.1 and 16.9. B) 18.4 and 14.3. C) 16.0 and 18.0. Your answer: B was correct! The ROE for Firm A is adjusted for the $400,000 loss on discontinued operations and the $300,000 non-recurring gain. The ROE for Firm B is adjusted to remove the effects of the $2.6 million one-time gain.