Net Book Value Produces a Misleading Increase in Return on Investment

question 46

Multiple Choice

Net book value produces a misleading increase in return on investment because:

• A) investment centres with old assets will show a higher return on investment than centres with new assets.
• B) investment centres with old assets will show a lower return on investment than investment centres with new assets.
• C) investment centres with old assets will show an equal return on investment centres with new assets.
• D) book value reflects changing market values.

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Definitions:

Long-term Investment

Assets purchased by a company to hold for more than one year, typically including stocks, bonds, or real estate.

Voting Stock

Shares that give the shareholder the right to vote on matters of corporate policy and the election of the board of directors.

Book Value

The net value of a company's assets minus its liabilities, essentially representing the total value of the company's assets that shareholders would theoretically receive if the company were liquidated.

Equity Method

An accounting technique used to record investments in other companies, where the investment gives the investor significant influence over the investee.