Question

Omni Technology Holding Company has the following three affiliates:

	Software	Personal Computers	Foreign Operations
Sales	\(40,200,000	\)60,080,000	$100,680,000
Net Income (after tax)	2,086,000	2,880,000	8,510,000
Assets	5,820,000	25,790,000	60,630,000
Stockholder’s equity	4,090,000	10,170,000	50,950,000

d. Which affiliate has the highest return on stockholders’ equity?

Short answer

The return on stockholder’s equity of Software (i.e. 51%) is the highest.

Step-by-step solution

Return on Stockholder’s equity of Software

$\begin{array}{rcl}\mathrm{Return}\mathrm{on}\mathrm{stockholder}\text{'}\mathrm{s}\mathrm{equity}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{Stockholder}\text{'}\mathrm{s}\mathrm{equity}}\\ & =& \frac{\$2,086,000}{\$4,090,000}\\ & =& 51\%\end{array}$

Return on stockholder’s equity of Personal computers

$\begin{array}{rcl}\mathrm{Return}\mathrm{on}\mathrm{stockholder}\text{'}\mathrm{s}\mathrm{equity}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{Stockholder}\text{'}\mathrm{s}\mathrm{equity}}\\ & =& \frac{\$2,880,000}{\$10,170,000}\\ & =& 28.32\%\end{array}$

Return on stockholder’s equity of Foreign operations

$\begin{array}{rcl}\mathrm{Return}\mathrm{on}\mathrm{stockholder}\text{'}\mathrm{s}\mathrm{equity}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{Stockholder}\text{'}\mathrm{s}\mathrm{equity}}\\ & =& \frac{\$8,510,000}{\$50,950,000}\\ & =& 16.70\%\end{array}$