Chapter 11, Problem 11.13ME

Calculating and Interpreting Earnings per Share (EPS) and Return on Equity (ROE)

Academy Driving School reported the following amounts in its financial statements:

	Year 1	Year 2
Number of common shares	11,500	11,500
Net income	$ 18,000	$ 23,000
Cash dividends paid on common stock	$ 3,000	$ 3,000
Total stockholders' equity	$220,000	$240,000

Calculate EPS and ROE for Year 2. Another driving school in the same city reported a higher net income ($45,000), yet its EPS and ROE ratios were lower than those for the Academy Driving School. Explain how this apparent inconsistency could occur.