ABC company is planning a major expansion for which it needs $5 million in external funding. It has various options as how to finance this expansion. Which of the following is correct?
A) Future ROA will be higher if it uses all equity financing than if it uses some debt financing
B) Future net income will be higher if it uses common stock rather than preferred stock to finance expansion
C) Future ROA is independent of the form of financing
D) Future net income is independent of the form of financing

Question

Quizplus · Accepted Answer

ROA (return on assets) is a measure of how efficiently a company is using its assets to generate earnings. It is calculated by dividing net income by total assets. The form of financing, whether it is debt or equity, does not affect the total assets of the company, hence it does not affect ROA. Therefore, Option C is correct.

ABC Company Is Planning a Major Expansion for Which It