Question

Clay starts a firm by putting up $200,000, and invests $100,000 each into two projects. Each of the two projects earns $20,000 for a total profit of $40,000. What is the return on equity?

Answer 1

Clay's return on equity for his firm is calculated to be 20%, determined by dividing the total profit of $40,000 by the total equity of $200,000 and then multiplying by 100%.

Step-by-step explanation:

Clay's return on equity (ROE) can be calculated by dividing the net profit by the shareholder's equity. Here's the step-by-step calculation:

1. 
   
3. First, we find the total profit, which is $40,000.
4. 
   
6. Next, we determine the total equity, which is the amount Clay initially invested, totaling $200,000.
7. 
   
9. Lastly, we calculate the ROE using the formula: ROE = (Net Profit / Shareholder's Equity) × 100%.
10. 
    
12. Substitute the known values into the formula: ROE = ($40,000 / $200,000) × 100% = 20%.

Therefore, Clay's return on equity for the firm is 20%.