Return on Common Equity Calculation | CFA® Level 1 Exam Prep

Return on Common Equity

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Question

The following data are available for a firm for a given year:

Net Sales 21,896 -

Sales & marketing expenses 4,346

Administrative expenses 2,143 -

COGS 10,084 -

Depreciation 967 -

Interest expense 573 -

Tax rate 35%

Dividends paid 3,445 -

Preferred Dividends 897 -

Average total equity 37,432 -

Average common equity 26,782 -

Average total liabilities 18,583

In the above example, the firm's return on common equity equals ________.

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A

Return on common equity = (Net income - preferred dividends)/average common equity. In the above example, Net Income = Earnings after depreciation, interest expense and taxes = (21,896 - 4,346 - 2,143 - 10,084 - 967 - 573)*(1 - 0.35) = 2,459. Therefore, Return on common equity = (2,459 - 897)/26,782 = 5.83%.

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