Which of the following statements regarding the return on equity (ROE)measure is incorrect?
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 amount of debt a company uses to finance its operations. ROE is a measure of how effectively a company is using its equity to generate profits, while return on investment (ROI) takes into account all sources of financing, including debt. Therefore, a company's ROE can be higher, lower, or equal to its ROI, depending on the amount of leverage it uses.

Which of the Following Statements Regarding the Return on Equity