Calculate the outstanding number of shares of a company using the following data: the company has a net profit of Rs. 500,000, a return on equity of 25%, and a book value per share of Rs. 100. Knowing the net profit and ROE allows us to calculate the total equity, which can then be divided by the book value per share to determine the number of shares outstanding.

Practice question from NISM XV Mock Test 2 — bank. The correct answer is highlighted below with a full explanation.

Options

A

2,000
20,000

Correct answer
C

200,000
D

200

Why this is the answer

Return on Equity (ROE) is calculated as Net Profit divided by Equity Value. Here, Equity Value = Net Profit / ROE = 500,000 / 0.25 = 2,000,000. The number of shares outstanding is then Equity Value divided by Book Value per Share = 2,000,000 / 100 = 20,000. Alternatively, using EPS, EPS = ROE × Book Value per Share = 25, and Outstanding Shares = Net Profit / EPS = 500,000 / 25 = 20,000.

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