Reading 48: Overview of Equity Securities

Question 1

An Equity Security’s Total Return

48.1

Overview of Equity Securities

Answer 1

P_t-1 = purchase price

P_t = sale price

D_t = cash or stock dividends

Question 2

Return on Equity (ROE)

48.2

Overview of Equity Securities

Answer 2

Where:

NI_t = net income in year t

Average Book Value of Equity is computed as the book values at the beginning and end of year t divided by 2

Question 3

Return on Equity (ROE)

(assuming that only the equity existing at the beginning of the year was used to generate the company’s net income during the year)

48.3

Overview of Equity Securities

Answer 3

Where:

NI_t = net income in year t