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      Question

      From the following details, calculate Return on Equity

      (ROE): Contributed capital Rs. 400,000 Retained earnings Rs. 100,000 Net sales Rs.8,00,000 Net Income Rs.80,000
      A 10% Correct Answer Incorrect Answer
      B 16% Correct Answer Incorrect Answer
      C 20% Correct Answer Incorrect Answer
      D 160% Correct Answer Incorrect Answer
      E Cannot be determined Correct Answer Incorrect Answer

      Solution

      ROE is a measure of a company’s profitability. Analysts look at the trend over time and compare the company’s ratio to the industry average to determine the profitability of the company. ROE is equal to net income divided by common stockholders’ equity. Common stockholders’ equity is equal to the sum of contributed capital and retained earnings if there is no preferred stock. Equity = Contibuted capital + retained profit = 400,000 + 100,000=500,000 ROE = Net profit / Common Equity =80,000/500,000=0.16 or 16%  

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