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ROE

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If you owned a business that had a net worth [shareholder's equity] of $600 million dollars and it made $36 million in profit

What is the earning on the equity?
What is the formula?
Can it be written in percentage?

What is the formula for IRR?
CAN YOU GIVE AN EXAMPLE?

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Solution Summary

The return on equity for shareholder's are examined. The written percentages and formulas are given.

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First of all, it is not earning on Equity but return on Equity. The formula for calculating Return on Equity is:

Net income/ Shareholder's equity.

One of the most important profitability metrics is return on equity [or ROE for short]. Return on equity reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. A business that has a high return on equity is more likely to be one that is capable of generating cash internally.

Source: http://beginnersinvest.about.com/library/lessons/bl-returnonequity.htm

In this case it will be: 36/600=.06 or 6%

Yes, it is expressed as a percentage.

IRR:

Often used in capital budgeting, it's the interest rate that makes net present value of all cash flow equal zero. Essentially, this is the return that a company would earn if it expanded or invested in itself, rather than investing that money elsewhere.

Source: http://www.investopedia.com/terms/i/irr.asp

The formula ...

Solution provided by:
Sandeep Bardia, MBA
Education
  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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