Question

Which of the following can be used to compute the return on equity?

I. Profit margin × Return on assets
II. Return on assets × Equity multiplier
III. Net income/Total equity
IV. Return on assets × Total asset turnover

A. I and III only

B. II and III only

C. II and IV only

D. I, II, and III only

E. I, II, III, and IV

Answer 1

Return on equity can be calculated using II. Return on assets × Equity multiplier and III. Net income/Total equity, which corresponds to answer option B. II and III only. Other options do not calculate ROE correctly. Option b

Step-by-step explanation:

The return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholder's equity. Because shareholder's equity is equal to a company’s assets minus its debt, ROE could be thought of as the return on net assets. ROE is considered a gauge of a corporation's profitability and how efficiently it generates profits.

To compute return on equity, you can use different formulas:

Net income/Total equity - This directly measures how much income is generated per dollar of shareholder equity.

Return on assets (ROA) × Equity multiplier - The ROA gives insight into how effectively the company uses its assets to generate profit, while the equity multiplier shows the proportion of assets financed by equity.

Therefore, the correct choices for computing return on equity are II and III, which makes option B (B. II and III only) the correct answer. The other options described are incorrect combinations or represent other financial metrics.

Option IV is incorrect because it calculates the Return on Assets (ROA), not ROE. Profit margin multiplies by total asset turnover is another way of calculating ROA, not directly used for ROE. Hence, options I and IV should not be used for the calculation of return on equity. Option b