CFA Practice Question

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CFA Practice Question

Which one of the following does the Return on Common Equity (ROCE) ratio measure?

A. The proportion of net operating profit after taxes (NOPAT) that belongs to common shareholders
B. The degree to which the company uses common shareholders' capital to finance assets
C. How a company performs in using shareholders' capital to generate earnings
D. The profitability of operations, without considering how the company's assets are financed
Correct Answer: C

ROCE is measured as ROA * Common earnings leverage * Financial structure leverage.

User Contributed Comments 8

User Comment
Gina or
(NI-Preferred Dividends)/Avg Common Equity
haarlemmer I was just wondering whether answer C would be common shareholders or simply shareholders.
kiwags C is vague. Shareholders' capital could include preferred stock too.
desertfox27 when you would say shareholders, they common stock owners, the real owner of the company. they own share of stocks, or common shares, thus, shareholders.
kutta2102 desertfox27 and kiwags: the question specifically talks about "common" shareholders - this would exclude preferred shareholders.
papajeff these are dirty questions, toughest material so far in level 1 in my opinion
johntan1979 I agree with the general sentiment here... C is not 100% accurate, but seems to be the best available option here.

Shareholder = individual owner of at least one share in a corporation, and that includes preferred shares
Akiva Could anyone explain, how we get:
ROCE = ROA * Common earnings leverage * Fin structure leverage ?
ROA uses only NI, not NI - Preffered stocks
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