When will ROE equal ROC?
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

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

When Will ROE Equal ROC