HighLev Incorporated borrows heavily and uses the leverage to boost its return on equity to 30% this year,nearly 10% higher than the industry average.However,HighLev's stock price decreases relative to its industry counterparts.How is this possible?
A) Markets are inefficient and fail to recognize the benefits of leverage.
B) The increased debt resulted in interest payments that made HighLev's operating income drop even though return on equity increased.
C) Shareholders are not interested in return on equity.
D) The high levels of debt increased the riskiness of HighLev relative to its competitors.

Question

Quizplus · Accepted Answer

High levels of debt increase the riskiness of a company, making it riskier for investors to hold the stock. This increased risk may lead to a decrease in the stock price, even though the return on equity is higher than the industry average.

HighLev Incorporated Borrows Heavily and Uses the Leverage to Boost