Question

Which statement is TRUE? A.     When calculating return on total equity, it is normal to add...

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.

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Answer #1

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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