Last Year's Return on Equity Was 30

question 49

Multiple Choice

Last year's return on equity was 30%.This year the ROE has decreased to 20% even though the firm's earnings equaled last year's earnings.The firm has no preferred stock.What caused the decrease?

• A)equity decreased by 10%.
• B)equity decreased by 50%.
• C)equity increased by 10%.
• D)equity increased by 50%.

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Definitions:

Sunk Cost Bias

The decision to continue an investment based on past investments of time, effort, and/or money.

Projection Bias

The tendency to mistakenly assume that others share one's current thoughts, feelings, or attitudes.

Randomness Error

An error that occurs when there is no discernible pattern or cause in the mistake or variability.

Intuition

An unconscious process of making decisions based on imagination and possibilities.