Banks that use preferred stock understate their ROE relative to banks that do not use preferred stock.

Question

Quizplus · Accepted Answer

ROE (Return on Equity) is calculated by dividing net income by shareholder equity. Preferred stock is considered part of shareholder equity. Banks that issue preferred stock increase their equity base, which could lead to a lower ROE if net income does not increase proportionally, not an understatement of ROE.

Banks That Use Preferred Stock Understate Their ROE Relative to Banks