The Return on Assets Measures Operating Performance Independent of Financing

question 54

Essay

The return on assets measures operating performance independent of financing while the return on common shareholders' equity considers the cost of debt and preferred stock financing.Describe the relationship between ROA and ROCE in terms of where each dollar of return generated by assets is allocated.

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Definitions:

Fixed Costs

Expenditures on items like rent, salaries, and insurance that stay fixed, irrespective of production or sales figures.

Contribution Margin Ratio

A financial metric that calculates the percentage of sales revenue that exceeds variable costs, contributing toward fixed costs and profit.

Break-Even Point

The break-even point is the point at which total costs and total revenue are equal, resulting in no net loss or gain, and is used for analyzing the financial viability of a product or service.

Pretax Income

The amount of income earned by a business before the deduction of taxes; it is found by subtracting all expenses, except tax expenses, from revenues.