Series 79 practice questionmediumProfitability Ratios
A company’s net income rose from $10 million to $12 million, and average equity increased from $40 million to $48 million. What happened to its ROE?
- AIt increased
- BIt decreased
- CIt stayed the same✓ Correct answer
- DCannot be determined
Explanation
Why C — It stayed the same
ROE = net income / average equity. Before the change, ROE was $10 million / $40 million = 25%. After the change, ROE was $12 million / $48 million = 25%. Because both net income and average equity increased by the same proportion, ROE stayed the same.
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