Division a Has a Higher ROE Than Division B, Yet

question 41

Multiple Choice

Division A has a higher ROE than Division B, yet Division B creates more value for shareholders and has a higher EVA than Division A. Both divisions, however, have positive ROEs and EVAs. What could explain these performance measures?

• A) Division A is riskier than Division B.
• B) Division A is much larger (in terms of equity capital employed) than Division B.
• C) Division A has less debt than Division B.
• D) Statements a and b are correct.
• E) All of the statements above are correct.

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Definitions:

Context Effects

The influence of environmental factors on one's perception or understanding of a stimulus.

Perceptual Set

A readiness to perceive or interpret stimuli in a particular way based on expectations, experiences, emotions, and culture.

Weber's Law

A principle stating that the smallest change in a physical stimulus that can be detected is a constant proportion of the stimulus level.

Masking Stimulus

A stimulus used to interfere with the perception of another stimulus, often used in research to study attention and perception processes.