1. The rate of return on assets ratio is computed by dividing net income and interest expense, net of tax, by average total assets. Why is the numerator net income and interest expense, net of tax,...

1. The rate of return on assets ratio is computed by dividing net income and interest expense, net of tax, by average total assets. Why is the numerator net income and interest expense, net of tax, rather than just net income?

2. What is meant by the ‘‘quality’’ of a company’s earnings? Explain why the price/ earnings ratio for a company may indicate the quality of earnings.