When calculating a firm’s return on shareholders’ equity (ROE), some investment professionals modify the ROE ratio by subtracting any dividends paid by the firm to its preferred stock shareholders as follows:

This modified ROE ratio is often referred to as the “return on common equity,” or ROCE. Discuss why and when ROCE might be a superior assessment of a firm’s return on equity.

Transcribed Image Text:

Return on shareholders' equity: = (Net income-Preferred stock dividends) (Total shareholders' equity-Preferred stock equity)