Question

Return on equity is a ratio that:

a) cannot be calculated if the company has preferred shares in addition to common shares
b) is calculated by dividing net income plus preferred dividends by average common shareholders' equity and shows the relationship between net income available for common shareholders and average common shareholders' equity
c) is calculated by dividing net income plus preferred dividends by average common shareholders' equity
d) shows the relationship between net income available for common shareholders and average common shareholders' equity

Answer 1

Return on Equity (ROE) shows the relationship between net income available to common shareholders and average common shareholders' equity. The correct option is D.

Step-by-step explanation:

The correct answer to the question - Return on equity is a ratio that: is (d) shows the relationship between net income available for common shareholders and average common shareholders' equity.

Return on Equity (ROE) is a measure of financial performance calculated by dividing net income (minus preferred dividends) by shareholders' equity.

Essentially, it measures how much profit a company generates with the money shareholders have invested. It does not include preferred dividends in the numerator, since these are not available to common shareholders.

Instead, it uses net income, which is the profit available after preferred dividends are paid. This ratio can still be calculated if the company has preferred shares; you just need to ensure that preferred dividends are subtracted from net income before the calculation. The correct option is D.