The proper denominator to use in computing return on common equity is
A) Beginning total shareholders' equity, including both common and preferred shares
B) Beginning total shareholders' equity, including common but not preferred shares
C) Average total shareholders' equity, including both common and preferred shares
D) Average total shareholders' equity, including common but not preferred shares

Question

Quizplus · Accepted Answer

Return on common equity only measures the profitability of the common shareholders' investments, so it is appropriate to use the average total shareholders' equity, which excludes the preferred shares. This gives a better reflection of the return to common shareholders as they are the ones who are exposed to the company's business risks.

The Proper Denominator to Use in Computing Return on Common