Asked by Sarah-Michele Newton on May 02, 2024
Verified
If the interest rate on debt is lower than ROA, then a firm will __________ by increasing the use of debt in the capital structure.
A) increase the ROE
B) not change the ROE
C) decrease the ROE
D) change the ROE in an indeterminable manner
ROA
Return on Assets represents a financial metric that measures a company's profitability in relation to its overall assets.
Capital Structure
The mix of different forms of external funds used by a firm to finance its activities, including debt and equity.
ROE
Return on Equity (ROE) is a financial ratio that measures the profitability of a company relative to shareholder equity.
- Analyze the effect of debt on a firm's return on equity (ROE) under different conditions.
Verified Answer
ZK
Zybrea KnightMay 07, 2024
Final Answer :
A
Explanation :
When the interest rate on debt is lower than the Return on Assets (ROA), leveraging more debt in the capital structure will increase the Return on Equity (ROE) because the firm is able to earn more on the borrowed funds than it pays in interest.
Learning Objectives
- Analyze the effect of debt on a firm's return on equity (ROE) under different conditions.