For a given level of after-tax income, the lower the level of equity a firm has, then the higher the return on equity its shareholders will earn.

Question

Quizplus · Accepted Answer

This statement is generally true because a lower level of equity means the firm has less capital invested in the business, which can lead to higher returns on equity for shareholders. This is because the earnings are spread out over a smaller amount of equity, resulting in a higher percentage return. However, it's important to note that this relationship is not always a direct one, and other factors can also impact a firm's return on equity.

For a Given Level of After-Tax Income, the Lower the Level