n NISM Certifications
XV NISM Series XV
Medium

A company has a Return on Capital Employed (ROCE) of 6% and its cost of debt is 8%. What is the likely impact on its Return on Equity (ROE)?

Practice question from NISM XV Mock Test 1 — bank. The correct answer is highlighted below with a full explanation.

Options

  1. A

    ROE is likely to be above 8%

  2. ROE is likely to be below 6%

    Correct answer

  3. C

    ROE will be 2%

  4. D

    ROE is likely to be between 6% to 8%

Why this is the answer

Since the cost of debt (8%) exceeds ROCE (6%), the returns after interest payments reduce equity returns. Therefore, ROE will be lower than 6%.

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NISM XV Mock Test 1