Net Income

Bramwell Foods reports operating income of $9 million, interest expense of $2 million and a tax rate of 25%. What is net income, assuming no other items?

1. A.$6.75 millionWrong. This applies the 25% tax rate to operating income ($9M) rather than to pretax income after interest.
2. B.$9 millionWrong. This is operating income, before interest and taxes are deducted.
3. C.$7 millionWrong. This is pretax income; it has not yet been reduced for taxes.
4. D.$5.25 millionCorrect. Pretax income of $7M taxed at 25% leaves net income of $5.25 million.

Why: Pretax income = operating income − interest expense = $9M − $2M = $7M. Net income = pretax income × (1 − tax rate) = $7M × 0.75 = $5.25 million.

Carrow Logistics reports net income of $16 million and average stockholders' equity of $80 million for the year. What is its return on equity (ROE)?

1. A.5.0xWrong. This inverts the ratio (equity ÷ net income).
2. B.16%Wrong. This does not correctly divide the given figures.
3. C.20%Correct. $16M ÷ $80M = 20%.
4. D.$64 millionWrong. This subtracts instead of dividing, and ROE is a percentage, not a dollar figure.

Why: ROE = net income ÷ average stockholders' equity = $16M ÷ $80M = 20%.