The higher the debt-equity ratio, the greater the difference between return on assets and return on equity.

Question

Quizplus · Accepted Answer

A higher debt-equity ratio indicates a higher level of debt financing relative to equity financing. This leverage amplifies the difference between return on assets (ROA) and return on equity (ROE) because ROE benefits from the leverage effect, increasing with debt as long as the return on assets exceeds the cost of debt.

The Higher the Debt-Equity Ratio, the Greater the Difference Between