Which statement is TRUE? A. When calculating return on total equity, it is norma
ID: 2536720 • Letter: W
Question
Which statement is TRUE?
A. When calculating return on total equity, it is normal to add back preferred dividends to net income.
B. Return on invested capital is a better measure of profitability than earnings as earnings numbers fail to reflect the capital needed to generate those earnings.
C. The accounting-based stock valuation formula calculates the value of a stock as the book value of the net operating assets plus the present value of future expected dividends discounted at the cost of equity.
D. Practice considers a segment significant if its sales, operating income (or loss), or identifiable assets are 30% or more of the combined amounts of all the company's operating assets.
Explanation / Answer
Correct answer is "B". Following statement is TRUE:
B. Return on invested capital is a better measure of profitability than earnings as earnings numbers fail to reflect the capital needed to generate those earnings.
Explanation: Statement is true because return on invested capital includes the amount of capital invested and calculates return as % of capital invested whereas the earning are just numbers they do not show any relation with capital invested.
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