Why Would Managers Use the Accounting Rate of Return to Evaluate

question 134

Multiple Choice

Why would managers use the accounting rate of return to evaluate potential investment projects?

• A) It does not consider the time value of money.
• B) Bonuses to managers may be based on accounting income and/or return on assets.
• C) It serves as a screening measure to ensure that new investments do affect key financial ratios.
• D) Debt contracts require that a company maintain certain ratios that are not affected by income and long-term asset levels.

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Definitions:

Optimal Capital Structure

The most favorable mix of debt and equity financing that minimizes the company's cost of capital and maximizes its value.

EPS

Earnings Per Share, a financial metric used to indicate the profitability of a company on a per-share basis.

Net Income

The total profit of a company after all expenses and taxes have been deducted from revenue.

Financial Leverage

The use of borrowed funds with the goal to increase the potential return on investment.