Question

A company’s net income after tax is $50,000. Shareholder’s equity of the company is $200,000 and its long-term liability is $30,000. What is the company’s return on equity?

A.
15%
B.
20%
C.
25%
D.
30%
E.
35%

Answer 1

Answer:C. 25%.

Return on Equity or RoE is a measure of financial performance by a company. It measures how well a company's management has handled the funds provided by its shareholders.

We calculate RoE with the following formula:

`\mathbf{RoE = (Net Income)/(Shareholder's Equity)}`

`RoE = (50,000)/(200,000)`

`\mathbf{RoE = 0.25}`

Since RoE is expressed as a percentage, RoE is 25%.