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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Stocks (NISM XXI-A)

A company has net profit after tax of Rs 120 crore, and shareholders' equity of Rs 800 crore at the start and Rs 1,000 crore at the end of the year. Using average shareholders' equity, what is its return on equity (ROE)?

The ROE is about 13.3%. Using average equity of Rs 900 crore, being the mean of opening Rs 800 crore and closing Rs 1,000 crore, profit of Rs 120 crore divided by 900 gives 13.33%. Using only opening or closing equity would give 15% or 12%.

  1. A12.0%
  2. B15.0%
  3. C13.3%Correct
  4. D12.5%

Explanation

Average equity = (800 + 1,000) / 2 = Rs 900 crore. ROE = 120 / 900 = 13.33%. Using closing equity gives 12.0%, using opening equity gives 15.0%, and 12.5% is not supported by the data.

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