When considering the difference between return on net operating assets (RNOA) and return on common shareholders' equity (ROCE), which of the following statements is incorrect?

Question

Quizplus · Accepted Answer

RNOA is a pre-interest measure, meaning it does not consider the impact of interest expense. ROCE, on the other hand, is a post-interest measure as it deducts interest expense from net income in the numerator. Therefore, statement C is incorrect. The other statements are correct. Preferred dividends are not deducted from the numerator of RNOA because they are considered part of the operating liabilities, whereas they are deducted from the numerator of ROCE because they are considered a cost of financing. RNOA is independent of the form of financing because it is based solely on the operating income and net operating assets, while ROCE is affected by the financing structure because it uses the net income attributable to common shareholders and the average common equity.

When Considering the Difference Between Return on Net Operating Assets