Question

Return on common stockholders' equity is most closely related to

a. gross profit rate and operating expenses to sales ratio.
b. profit margin and free cash flow.
c. times interest earned and debt to stockholders' equity ratio.
d. return on asset and leverage (debt to assets ratio).

Answer 1

Return on common stockholders' equity is most closely related to the profit margin and leverage, specifically the debt to assets ratio.

Step-by-step explanation:

Return on common stockholders' equity (ROE) focuses on the profitability relative to the equity that common shareholders have invested in the firm. ROE can be influenced by a company's profit margin, which is the accounting profit divided by total revenues, and leverage, expressed in the debt to assets ratio. Among the options presented, profit margin and leverage (debt to assets ratio), mentioned in option (d), are most closely related to ROE because they reflect both the net income generated per dollar of revenue and the impact of financial structure on equity returns. Interest rates impact the cost of borrowed funds, which can also affect ROE, but are not a direct component of it.

Answer 2

The correct option is D

Step-by-step explanation:

Return on common stockholders' equity also known as ROE which stands for Return on equity ratio, that measures the ability of the firm or company to generate the profits from the investment of shareholders in the company.

Where as Debt to assets ratio, is the one which measures the percentage of aggregate assets of the firm or company which were financed by the creditors.

Therefore, the return on common stockholders' equity is related to the debt to asset ratio.