Final answer:
Return on equity is the net income after taxes divided by total owner's equity. It reflects the profitability and efficiency of using shareholder's equity. The concept applies as well to evaluating home equity and can represent the actual rate of return on an owned property.
Step-by-step explanation:
Return on equity is net income after taxes divided by total owner's equity. This formula measures a company's profitability and how effectively it uses shareholders' equity. In terms of personal finance, for example, if you purchased a house for $200,000 with a down payment of $20,000 and a bank loan for the remaining $180,000, your equity increases as you pay down the mortgage and if the property's market value rises. If the mortgage balance owed is $100,000 and the house's market value is $250,000, the homeowner's equity would be $150,000. The actual rate of return would include the equity gained and any rental income received if the property was rented out.