Return on Equity Can Be Calculated By: Net Income

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.