The Blue Bird LTD has total assets of $223 500, a debt- equity ratio of 0.45, and return on equity is 12%. What is the net income?

$18,497

Explanation:

As per Accounting Equation;

Total Assets = Total Liabilities + Stockholders' Equity

Total Assets = $223,500

Suppose, If;

Total Liabilities = x, &

Stockholders' Equity = y, then above equation can be written as follows;

$223,500 = x + y Equation 1

Debt to Equity Ratio formula is as follows;

D/E = Total Liabilities / Stockholders' Equity

where, D/E = 0.45

Based on the assumptions the above equation can be written as follows;

0.45 = x / y

Multiply whole equation by 'y' we get;

x = 0.45y

Put the value of x in Equation 1 we get;

0.45y + y = $223,500

1.45y = $223,500

Divide the above equation by 1.45 we get;

y = $223,500/1.45

y = $154,137.93

which means Stockholders' Equity = $154,138

Now let's substitute the value of Stockholders' Equity in the Return on Equity Ratio formula to find the net income as follows;

ROE = Net Income / Stockholders' Equity

where, ROE = 12%

12% = Net Income / $154,138

Multiply the above equation by $154,138, we get;

Net Income = $154,138 x 12%

Net Income = $18,496.55

Hence Net Income of the Blue Bird LTD for the period would be $18,497.

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