Question

What is Return to Equity?

A. Profit paid to a single owner of a small business

B. Profit paid to stockholders, (i.e. to the multiple owners of a business)

C. Retained Earnings plus Dividends paid to stockholders

D. All of the Above

Answer 1

Return of equity is the amount which is earned by different investors on the amount they have invested in the business.

It can be calculated as:

Return on equity = Net income or Profit / Stockholders' equity

Profit earned by single owner of a small business is his net profits and not return to equity. Retained earnings are the part of stockholders' equity or profits of the company which is kept in business and dividends are calculated after the net income has been calculated to find out return on equity, so these can not be termed as return to equity.

So, the correct option is B.) Profit paid to stockholders, (i.e. to the multiple owners of a business) is referred to as Return to Equity.