NASAA Series 66 Uniform Combined State Law ExaminationEconomic Factors and Business InformationMedium
A company reports total assets of $50 million, total liabilities of $20 million, and total shareholder equity of $30 million. Its net income for the year was $5 million, and it had 10 million shares outstanding. What is the company's Return on Equity (ROE)?
- A20%
- B10%
- C25%
- D16.67%
Show answer & explanationAnswer & explanation
Correct answer: D. 16.67%
Return on Equity (ROE) is calculated as Net Income divided by Shareholder Equity. In this case, ROE = $5 million (Net Income) / $30 million (Shareholder Equity) = 0.16666... or 16.67%.
Why the other options are wrong
- A. Incorrect. This might be a calculation of Return on Assets ($5M / $50M).
- B. Incorrect. This might be a miscalculation using total assets or an incorrect denominator.
- C. Incorrect. This might be a miscalculation or using shares outstanding in the denominator for earnings per share, which is not ROE.
Return on Equity (ROE)
A profitability ratio that measures the amount of net income returned as a percentage of shareholder equity.
- Formula: Net Income / Shareholder Equity.
- Indicates how efficiently a company uses shareholder investments.
- Higher ROE generally suggests better financial performance.
Memory trick: ROE: Net Income, Shareholder's Delight.