If net income increases while average shareholders' equity remains the same, what happens to ROE?

If net income increases while average shareholders' equity remains the same, what happens to ROE?

• A. It decreases.
• B. It remains the same.
• C. It increases.
• D. It becomes unpredictable.

Answer: (C)

Return on equity shows how much profit is earned for each dollar of shareholders’ equity. It’s calculated as Net Income divided by Average Shareholders’ Equity. If net income increases while average equity stays the same, the numerator grows while the denominator remains unchanged, so the ROE increases. For instance, boosting net income while equity is constant raises the amount of profit per dollar of equity, delivering a higher return to shareholders. The result cannot be the same, decrease, or unpredictable in this scenario because the math ties directly to a higher numerator with a fixed denominator.

Return on equity shows how much profit is earned for each dollar of shareholders’ equity. It’s calculated as Net Income divided by Average Shareholders’ Equity. If net income increases while average equity stays the same, the numerator grows while the denominator remains unchanged, so the ROE increases. For instance, boosting net income while equity is constant raises the amount of profit per dollar of equity, delivering a higher return to shareholders. The result cannot be the same, decrease, or unpredictable in this scenario because the math ties directly to a higher numerator with a fixed denominator.