Return on Equity (ROE)can Be Calculated By: Net Income

question 6

Multiple Choice

Return on equity (ROE) can be calculated by: Net Income / Average Shareholders' Equity.The reasoning for this method is:

• A)net income is earned over the year and shareholder's equity measures invested capital at the end of the year.Average shareholder's equity gives a measure of capital invested throughout the year.
• B)net income is measured at the end of the year and shareholder's equity is measured at the beginning of the year.Averaging the shareholder's equity will result in a better match between the timing of the net income measure and the measure of the invested capital (equity).
• C)to reduce the number of observations.
• D)to increase ROE as average shareholders' equity is usually lower than ending shareholders' equity.

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