The mere fact that a firm is earning high rates of return on its asset indicates that
A) the firm is worth more as a going concern than as a dead one.
B) downsizing is likely to be an economically sound option for the business.
C) it is time to start growing the business again.
D) it might be wise to further limit the cash flows returned to investors.

Question

Quizplus · Accepted Answer

High rates of return on assets indicate that the firm is earning more than the cost of the assets, which means the assets are being used efficiently and adding value to the firm. This suggests that the firm is worth more as a going concern than as a dead one, as it is generating positive returns on its investment. Therefore, option A is the best choice. Downsizing (B) or limiting cash flows returned to investors (D) may not be economically sound options for a firm that is generating high returns on its assets. Option C is also not a necessary action as the firm may have reached a level of growth that is sustainable and does not require further expansion.

The Mere Fact That a Firm Is Earning High Rates