David is trying to decide whether to add capital through investing more of his own money or through borrowing money from the bank. To help him decide, you remind him that as long as his firm's rate of return on its assets is greater than the cost of the debt, his rate of return on equity will _____ as the firm uses more debt.

Question

Quizplus · Accepted Answer

This statement describes the concept of financial leverage, which suggests that using debt can amplify the return on equity as long as the return on assets exceeds the cost of the debt. Therefore, as the firm uses more debt, the rate of return on equity will increase.

David Is Trying to Decide Whether to Add Capital Through