Which of the following is the most correct (assume that preferred stock does not

Question

Which of the following is the most correct (assume that preferred stock does not exist)?

Return on Common Equity (ROCE) will always be higher than Return on Assets (ROA).

Return on Common Equity (ROCE) will always be higher than Return on Assets (ROA).

Return on Common Equity (ROCE) can be higher or lower than Return on Assets (ROA) but the two can never be equal.

In the absence of debt, Return on Common Equity (ROCE) will be equal to Return on Assets (ROA).

Return on Common Equity (ROCE) will always be higher than Return on Assets (ROA).

Return on Common Equity (ROCE) will always be higher than Return on Assets (ROA).

Return on Common Equity (ROCE) can be higher or lower than Return on Assets (ROA) but the two can never be equal.

In the absence of debt, Return on Common Equity (ROCE) will be equal to Return on Assets (ROA).

Explanation / Answer

The most correct statement is :

In the absence of debt, Return on Common Equity (ROCE) will be equal to Return on Assets (ROA).

This statement is correct for unlevered firm,where the company has assets backed by common Equity and has no Liability. So,in this case the value of Equity will be equal to the total Asset Value.

Both ROCE and ROA is calculated by taking the Net Income ,therefore both ROCE and ROA will be equal.

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