Firm A is very aggressive in its use of debt to leverage up its earnings for common stockholders, whereas Firm NA is not aggressive and uses no debt. The two firms' operations are identical--they have the same total investor-supplied capital, sales, operating costs, and EBIT. Thus, they differ only in their use of financial leverage (wd). Based on the following data, how much higher or lower is A's ROE than that of NA, i.e., what is ROEA - ROENA?
A) 8.60%
B) 9.06%
C) 9.53%
D) 10.01%
E) 10.51%

Question

Quizplus · Accepted Answer

Firm A's use of debt increases its financial leverage, which amplifies the return on equity (ROE) compared to Firm NA, which uses no debt. The difference in ROE is calculated based on the impact of financial leverage on earnings available to common stockholders.

Firm a Is Very Aggressive in Its Use of Debt