Final answer:
A return on owners' equity of 13% means that the company earns a 13% return on the equity that the owners have invested. This shows how effectively the equity is used in generating profit. In the Gizmo Company situation, with a 5% social benefit, society would get an 18% total return.
Step-by-step explanation:
A return on owners' equity of 13% should be interpreted as the company earning 13 cents for every dollar of the equity the owners have in the company. This percentage signifies how effectively the owners' invested capital is being utilized to generate profits. It's an important metric in analyzing a company's financial health and performance. For instance, if the Gizmo Company invests in developing new household gadgets, and the expected rate of return on owners' equity is 13%, this means for every dollar of equity in the company, it is generating a 13% return based on expected rates of return from sales.
Considering the provided scenario where the Gizmo Company's investments also yield a 5% social benefit, if the company earns a return of 6% on its investments, society would receive an 11% benefit. Therefore, if the company were to earn a 13% return on equity, society would benefit by an additional 5%, making the total social return 18%.
When applied to tangible assets like housing, the concept of return on owners' equity illustrates how homeowners can earn a return on their investment. For example, if you buy a house and your equity in the home increases over time due to mortgage repayment or property value increase, then the return on your equity would reflect the growth of that investment.