Asked by JORDAN ESCOBAR on Jun 30, 2024
Verified
A firm increases its financial leverage when its ROA is greater than the cost of debt. Everything else equal, this change will probably increase the firm's:
I. Beta
II. Earnings variability over the business cycle
III. ROE
IV. Stock price
A) I and II only
B) III and IV only
C) I, III, and IV only
D) I, II, and III only
Financial Leverage
The use of borrowed money to increase the potential return of an investment, amplifying both potential gains and losses.
ROA
Return on Assets, a profitability ratio indicating how efficient a company is at using its assets to generate earnings.
ROE
Return on Equity, a measure of financial performance calculated by dividing net income by shareholder's equity.
- Learn about the repercussions financial decisions have on a firm's financial leverage and its risk exposure.
Verified Answer
Learning Objectives
- Learn about the repercussions financial decisions have on a firm's financial leverage and its risk exposure.
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