A company can improve its return on equity (ROE) by changing its capital structure.

Question

Quizplus · Accepted Answer

Return on equity (ROE) is calculated by dividing net income by shareholders' equity. By changing the capital structure, a company can alter the amount of debt and equity on its balance sheet, which can impact its net income and subsequently the ROE. For example, if a company increases its debt financing, its interest expense will increase, which will decrease net income and lower the ROE. Conversely, reducing debt and increasing equity financing can lead to higher net income and a higher ROE.

A Company Can Improve Its Return on Equity (ROE) by Changing