If a firm does not have debt, then ____.
A)the firm has no financial risk
B)the firm has no business risk
C)the firm's ROA is less than its ROE
D)the firm's ROE is higher than it had debt

Question

Quizplus · Accepted Answer

If the firm does not have debt, it means that it is operating with only equity financing. This implies that there are no interest payments or principal repayments due to creditors, so the financial risk of the firm is low. Financial risk is the risk associated with the use of debt in capital structure, and it increases as a company takes on more debt. Therefore, if the firm has no debt, it has no financial risk. However, it does not mean that the firm has no business risk, which is the risk that arises from the nature of the firm's operations, competition, economic conditions, etc. Furthermore, the relationship between ROA and ROE is not necessarily affected by the presence or absence of debt.

If a Firm Does Not Have Debt, Then ____