The use of debt in the firm's capital structure will increase ROE if the firm:
A)Has more debt than equity
B)Pays less in taxes than in interest
C)Earns a higher return than the rate paid on debt
D)Has a times interest earned greater than 1.0

Question

Quizplus · Accepted Answer

The use of debt in a firm's capital structure will increase ROE if the firm earns a higher return than the rate paid on debt. This is because the cost of debt is lower than the cost of equity, and therefore, using debt can enhance the return on equity. However, if the firm earns a lower return than the rate paid on debt, using debt can decrease the return on equity. Therefore, option C is the correct choice. Options A, B, and D are not necessarily true as having more debt than equity, paying less in taxes than in interest, and having a times interest earned ratio greater than 1.0 do not directly result in an increase in ROE.

The Use of Debt in the Firm's Capital Structure Will