Return on Equity Shareholders Funds

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Return on Equity Shareholders’ Funds

Meaning and objective: This ratio measures the relationship between net profit (after taxes and preference dividend) and equity shareholders funds. IN fact equity shareholders are the real owners who bear all risk, control the management and entitled to all profit remaining after appropriation for preference shareholders. Thus this ratio provides a real test for the utilization of equity shareholder money. Components: The components of this ratio are : (i) Net profit after tax and preference dividend (including participating dividend, if there are participating preference shareholders.) (ii) Equity shareholders’ funds include equity share capital (paid up) plus Reserves and Surplus minus fictitious assets. Important pint: Since the equity capital may change during the accounting period because of issue of new equity shares of buy-back of existing equity shares, it is appropriate to calculate the average equity shareholders funds by aggregating equity capital in the beginning plus equity capital at the end the then divided by 1. Formula: The ratio is calculated as under:

Return on Equity Shareholder's Funds =

Net Profit after tax and all types of preference dividends / Average Equity Shareholders Funds  x 100

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