Select the incorrect statement regarding the return on equity (ROE) measure.
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.

Question

Quizplus · Accepted Answer

This statement is incorrect because ROE takes into account the portion of the business that is financed by debt through the use of average total stockholders' equity in its calculation. ROE is not affected by a company's use of leverage, but the amount of leverage a company employs can impact its return on equity.

Select the Incorrect Statement Regarding the Return on Equity (ROE)