If a firm's expected return on equity equals its expected return on assets, then the:

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If a firm's expected return on equity equals its expected return on assets, then we can conclude that the cost of equity and cost of debt would be the same, and therefore the firm has no debt in its capital structure. This is because the expected rate of return on equity includes the cost of equity plus the benefit from leverage (i.e. tax shield), while the expected rate of return on assets includes both the cost of equity and cost of debt. Thus, if the two rates are equal, it is likely that the only source of financing for the firm is equity.

If a Firm's Expected Return on Equity Equals Its Expected