An increase in financial leverage will always reduce a firm's ROA, if its total assets are held constant.

Question

Quizplus · Accepted Answer

This is because an increase in financial leverage means an increase in debt, which increases the interest expense. This reduces the net income, thereby lowering the ROA. However, if the increase in financial leverage leads to an increase in total assets, then the effect on ROA will depend on the magnitude of the increase in assets relative to the increase in debt.

An Increase in Financial Leverage Will Always Reduce a Firm's