A company's return on assets will equal its return on equity if the after-tax cost of debt equals the return on assets.

Question

Quizplus · Accepted Answer

This statement is true. Return on equity (ROE) can be calculated as the company's net income divided by its shareholders' equity. Return on assets (ROA) can be calculated as the company's net income divided by its total assets. If the after-tax cost of debt (which is a component of the company's total assets) equals the ROA, then the ROE will be the same as the ROA because the cost of debt is already factored into the net income used in both calculations.

A Company's Return on Assets Will Equal Its Return on Equity