FSA Adjustments for ROE management, net, question, decrease, adjusted

ruchita

Regarding the question below: I adjusted the income statement correctly but also adjusted the shareholders equity because I thought that I decreased overall income then I would have to decrease overall equity. Answer just recommends adjusting income and recalculating, does anyone know why they would say this?

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. Which of the following is closest to the “normalized” ROE for Firm A and for Firm B, respectively?



Edited 1 time(s). Last edit at Wednesday, June 1, 2011 at 03:32PM by TDM123456.