When will return on equity equal return on capital?
A)whenever the firm has equal debt and equity financing.
B)whenever the firm has no interest payments on debt.
C)whenever the value of the firm's assets exceeds the value of its equity.
D)ROE will never equal ROC.

Question

Quizplus · Accepted Answer

Return on Equity (ROE) equals Return on Capital (ROC) when the firm has no interest payments on debt because interest expenses reduce net income (affecting ROE) but not operating income (affecting ROC). Without interest expenses, the distinction between equity and total capital (debt + equity) in terms of returns diminishes, making ROE and ROC equal.

When Will Return on Equity Equal Return on Capital