Suppose that Pop's Cycles,Inc.has a ROA of 7% and pays a 6% coupon on its debt.Pop's has a capital structure that is 70% equity and 30% debt.Relative to a firm that is 100% equity-financed,Pop's Net Profit will be ________ and its ROE will be _______.
A) lower,lower
B) lower,higher
C) higher,lower
D) higher,higher
E) It is impossible to predict.

Question

Quizplus · Accepted Answer

Pop's Cycles, Inc. has a lower Net Profit due to interest expenses from debt, but its ROE is higher because the use of debt (financial leverage) amplifies returns on equity.

Suppose That Pop's Cycles,Inc