If a firm\'s ROCE = R E and is expected to stay that way indefinitely in future,

Question

If a firm's ROCE = RE and is expected to stay that way indefinitely in future, it will:

create additional shareholder wealth and be valued above book value.

maintain shareholder wealth and be valued at book value.

destroy shareholder wealth and be valued below book value.

be in a negative growth state.

create additional shareholder wealth and be valued above book value.

maintain shareholder wealth and be valued at book value.

destroy shareholder wealth and be valued below book value.

be in a negative growth state.

Explanation / Answer

ROCE stands for Return on Capital Employed. It is a financial ratio and the formula for the same is as follows:
ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed
It measures the profitability of a company and how efficiently they are using their capital.

RE stands for Retained Earnings and refer to the percentage of net earnings not paid out as dividends. These can be retained for various purposes e.g. pay debt, investment in future projects, etc.

Therefore, If a firm's ROCE = RE and is expected to stay that way indefinitely in future, it will be in a negative growth state.

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