The tendency of the rate earned on stockholders' equity to vary disproportionately from the rate earned on total assets is
A) leverage
B) solvency
C) yield
D) quick assets

Question

Quizplus · Accepted Answer

The tendency of the rate earned on stockholders' equity to vary disproportionately from the rate earned on total assets is a characteristic of leverage. Leverage refers to the use of borrowed funds to finance investments, which amplifies the potential return but also increases the potential risk. The rate earned on stockholders' equity is impacted by the level of debt financing used by a company, while the rate earned on total assets is not as sensitive to leverage. Therefore, changes in leverage can cause the rate earned on stockholders' equity to vary disproportionately from the rate earned on total assets.

The Tendency of the Rate Earned on Stockholders' Equity to Vary