Which of the following describes the return on equity ratio?
A)[Net income + interest expense × 1 - tax rate))] ÷ average common shareholders' equity
B)[Net income - preferred shares] ÷ average common shareholders' equity
C)[Net income + preferred dividends] ÷ common shareholders' equity
D)[Net income - preferred dividends] ÷ average common shareholders' equity

Question

Quizplus · Accepted Answer

The return on equity ratio measures how much profit a company generates for each dollar of shareholders' equity. The formula for the return on equity ratio is (Net income - preferred dividends) ÷ average common shareholders' equity. Choice A is not correct because it includes interest expense and the tax rate, which are not related to the return on equity ratio. Choice B is not correct because it only subtracts preferred shares instead of preferred dividends. Choice C is not correct because it includes preferred dividends in the numerator instead of subtracting them.

Which of the Following Describes the Return on Equity Ratio