If a firm has a positive tax rate, a positive ROA, and the interest rate on debt is the same as ROA, then ROA will be
A) greater than the ROE.
B) equal to the ROE.
C) less than the ROE.
D) greater than zero, but it is impossible to determine how ROA will compare to ROE.
E) negative in all cases.

Question

Quizplus · Accepted Answer

The correct answer is A because when a firm has a positive tax rate, a positive ROA, and the interest rate on debt is the same as ROA, then ROA will be greater than the ROE. This is because the firm can use debt financing to increase its ROA without increasing its ROE.

If a Firm Has a Positive Tax Rate, a Positive