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:

Cash Dividends

Cash payouts by a company to its stock owners, regularly as a sharing of profits.

Net Income

The amount of profit left after all expenses, taxes, and costs have been subtracted from total revenue.

Stockholders' Equity

The residual interest in the assets of a corporation after deducting its liabilities, often referred to as shareholders' equity.

Common Stock Dividends Distributable

A liability account representing the amount of dividends declared by a company's board of directors but not yet paid to common shareholders.