Select the incorrect statement regarding the return on equity (ROE)measure.
A)ROE is used to measure the profitability of the firm in relation to the amount invested by stockholders.
B)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.
C)ROE is affected by a company's use of leverage.
D)ROE equals net income divided by total stockholders' equity.

Question

Quizplus · Accepted Answer

The statement is incorrect because ROE does take into consideration the portion of the business that is financed by debt, as it is calculated by dividing net income by total equity (which includes both equity and debt). Therefore, a company's ROE can be higher or lower than its return on investment depending on how it has financed its operations.

Select the Incorrect Statement Regarding the Return on Equity (ROE)measure