If a company has total assets of $700 million, liabilities of $500 million, and net income of $14 million, what is ROE?

• A. 6%
• B. 8%
• C. 7%
• D. 9%

Answer: (C)

Return on equity (ROE) measures how effectively a company turns shareholders’ equity into profit. It is calculated as net income divided by shareholders’ equity, where equity equals assets minus liabilities.

Here, total assets are 700 million and liabilities are 500 million, so shareholders’ equity = 700 − 500 = 200 million. Net income is 14 million.

ROE = 14 / 200 = 0.07 = 7%.

So the ROE is 7%. This would be 6%, 8%, or 9% only if net income were 12, 16, or 18 million, respectively, given the same equity.