To assess the adequacy of the return on capital employed (ROCE)that a firm earned in its most recent financial year,which of the following would not be an appropriate benchmark:
A)The ROCE earned by the same firm in previous years
B)The ROCE earned by competitors during the same period
C)The firm's cost of equity capital
D)The firm's weighted average cost of capital

Question

Quizplus · Accepted Answer

The firm's cost of equity capital is not a suitable benchmark to assess the adequacy of ROCE as it only reflects the return required by equity investors, not the return generated by the company on investments made with all sources of capital. Options A and D are appropriate benchmarks because they assess the company's performance over time and its cost of capital, respectively. Option B is relevant for comparative analysis but should not be the only benchmark considered as it does not necessarily reflect the company's unique circumstances.

To Assess the Adequacy of the Return on Capital Employed