Certified Valuation Analyst (CVA) Practice Exam

What percentage represents the return on equity based on the given data?

1. 10%

2. 12%

3. 16.5%

4. 20%

The correct answer is: 16.5%

To determine the return on equity (ROE), one needs to understand how this financial metric is calculated. ROE is expressed as a percentage that shows how effectively a company is using shareholders' equity to generate profits. The formula is: \[ \text{ROE} = \frac{\text{Net Income}}{\text{Shareholders' Equity}} \times 100 \] Based on the data provided, the correct answer, which states that ROE is 16.5%, indicates that the company's net income, relative to its shareholders' equity, is generating a return of this specific percentage. This level of return demonstrates a relatively strong ability of the company to convert equity into profits, suggesting efficient management and a solid business performance. The calculation that leads to this percentage reflects not only the company's profitability but also the capital invested by shareholders. A return of 16.5% can be considered favorable in many industries, indicating robust operational efficiency compared to industry standards and expectations. In contrast, other percentage options, such as 10%, 12%, or 20%, either suggest a lower effectiveness in utilizing equity or exceed the commonly accepted benchmark for typical returns without specific supporting data to justify such a high figure. Thus, identifying 16.5