Omni Shades and Raindew are two very similar businesses in all aspects except that Omni Shades relies mainly on equity financing, while Raindew relies heavily on debt financing. This year both firms have enjoyed strong growth in net income. This is likely to result in a higher return on equity for Omni Shades than for Raindew.

Question

Quizplus · Accepted Answer

Return on equity (ROE) is calculated as net income divided by shareholder's equity. Since Raindew relies heavily on debt financing, it has less equity, which can lead to a higher ROE compared to Omni Shades, assuming both have similar net incomes.

Omni Shades and Raindew Are Two Very Similar Businesses in All