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:

FIFO

A stock rotation and accounting method that assumes the oldest inventory items are sold or used first.

FOB Shipping Point

A shipping term indicating that the buyer assumes responsibility for the goods and transportation costs as soon as the goods leave the seller's premises.

Consignment

A business arrangement where goods are left in the possession of an authorized third party to sell, typically for a share of the revenue from the sale.

Financial Statements

Financial statements are formal records of the financial activities and position of a business, person, or other entity, typically comprising the balance sheet, income statement, and cash flow statement.