Which of the Following Statements Regarding the Return on Equity

question 93

Multiple Choice

Which of the following statements regarding the return on equity (ROE) measure is incorrect?

• A) ROE is used to measure the profitability of the firm in relation to the amount invested by stockholders.
• B) ROE equals net income divided by average total stockholders' equity.
• C) ROE is affected by a company's use of leverage.
• D) A company's ROE is lower than its return on investment because ROE does not consider that part of the business that is financed by debt.

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Definitions:

Cost Of Goods Sold

Refers to the total expense directly related to the production of goods or services a company sells.

Current Ratio

A liquidity ratio; current assets are divided by current liabilities to indicate a company’s ability to pay its short-term debt. This ratio does not provide as much certainty as the acid test ratio.

Current Assets

Assets that can be converted into cash or used within one year or the normal operating cycle of the business, whichever is longer.