Return on Equity Can Be Calculated By: Net Income

question 21

Multiple Choice

Return on equity 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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Definitions:

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