The tendency of the return on stockholders' equity to vary disproportionately from the return on total assets is because of
A) leverage
B) solvency
C) yield
D) quick assets

Question

Quizplus · Accepted Answer

The tendency for the return on stockholders' equity to vary more than the return on total assets is due to leverage. This is because stockholders' equity is calculated as total assets minus total liabilities, so any variation in the return on assets will have a larger effect on the return on equity because there is less money invested by stockholders. Leverage magnifies profits and losses, which can lead to disproportionate variations in return on equity.

The Tendency of the Return on Stockholders' Equity to Vary