When Is the Return on Assets Equal to the Return

question 3

Multiple Choice

When is the return on assets equal to the return on equity?

• A) When the current ratio of the firm equals 1.
• B) When the firm issues equal amounts of long term debt and common stock.
• C) When the firm issues no dividends for a given time period.
• D) When the firm only issues equity to finance its borrowing.

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Definitions:

Share Price

The price of a single share of a company's stock.

Interest Rate

The amount charged by a lender to a borrower for the use of assets, expressed as a percentage of the principal, usually on an annual basis.

Optimal Capital Structure

The ideal mix of debt and equity financing that minimizes a company's cost of capital and maximizes its value and stock price.

WACC

Weighted Average Cost of Capital, a calculation of a firm's cost of capital that weighs each category of capital proportionately.