Which of the following is the most correct (assume that preferred stock does not

Question

Which of the following is the most correct (assume that preferred stock does not exist)?

Return on Common Equity (ROCE) will always be higher than Return on Assets (ROA).

Return on Common Equity (ROCE) will always be higher than Return on Assets (ROA).

Return on Common Equity (ROCE) can be higher or lower than Return on Assets (ROA) but the two can never be equal.

In the absence of debt, Return on Common Equity (ROCE) will be equal to Return on Assets (ROA).

Return on Common Equity (ROCE) will always be higher than Return on Assets (ROA).

Return on Common Equity (ROCE) will always be higher than Return on Assets (ROA).

Return on Common Equity (ROCE) can be higher or lower than Return on Assets (ROA) but the two can never be equal.

In the absence of debt, Return on Common Equity (ROCE) will be equal to Return on Assets (ROA).

Explanation / Answer

Answer: Return on Common Equity (ROCE) can be higher or lower than Return on Assets (ROA) but the two can never be equal.

Because in absence of Debt Return on Common Equity (ROCE) will not be equal to Return on Assets (ROA).

ROA=(Net income/Total assets)*100

ROCE=(Net income/Average stockholder equity)*100

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