When the return on equity is equal to the return on capital employed:
A)the return on borrowed money equals the cost of borrowing the money.
B)the firm has optimized its financial leverage.
C)the firm is unleveraged.
D)All of the above

Question

Quizplus · Accepted Answer

When the return on equity (ROE) is equal to the return on capital employed (ROCE), it indicates that the firm is unleveraged, meaning it does not have debt in its capital structure or the impact of debt is neutral. This is because ROE measures the profitability relative to shareholders' equity, while ROCE measures profitability relative to both equity and debt financing. If they are equal, it suggests there is no benefit being derived from financial leverage (debt).

When the Return on Equity Is Equal to the Return