Finance And Investment Challenge Practice Test

If net income is $80 and equity is $500, what is return on equity (ROE)?

8% 20% 12% 16%

Correct Answer:

16%

Explanation:

Return on equity measures how much profit a company generates from each dollar of shareholders’ equity. It’s calculated as net income divided by equity. With net income of 80 and equity of 500, ROE = 80 / 500 = 0.16, or 16%. This means the company earns 16 cents for every dollar of equity invested. For context, an ROE of 8% would imply 40 in net income, 12% would imply 60, and 20% would imply 100, so those values don’t align with the given numbers.

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