Last year's return on equity was 30%.This year the ROE has decreased to 20%,while the same amount of earnings was generated this year.The firm has no preferred stock.What caused the decrease?
A) Equity decreased by 10%.
B) Equity decreased by 50%.
C) Equity increased by 10%.
D) Equity increased by 50%.

Question

Quizplus · Accepted Answer

The return on equity (ROE) is calculated as Net Income divided by Shareholder's Equity. Since the earnings (Net Income) remained the same but ROE decreased, it implies that the Shareholder's Equity must have increased. A 50% increase in equity would result in a decrease in ROE from 30% to 20% if earnings remain constant.

Last Year's Return on Equity Was 30