What is the formula of return on shareholder's funds?
Answer & explanation
Correct answer: option 2
The correct answer is option 2- Profit after Tax / Shareholders’ Funds × 100.
Return on Shareholders' Funds is very important from shareholders’ point of view in assessing whether their investment in the firm generates a reasonable return or not. It should be higher than the return on investment otherwise it would imply that company’s funds have not been employed profitably. A better measure of profitability from shareholders point of view is obtained by determining return on total shareholders’ funds, it is also termed as Return on Net Worth (RONW) and is calculated as under :
Return on Shareholders’ Fund = Profit after Tax / Shareholders’ Funds × 100