If the interest rate on debt is higher than ROA,then a firm will __________ by increasing the use of debt in the capital structure.
A) increase the ROE
B) not change the ROE
C) decrease the ROE
D) change the ROE in an indeterminable manner
E) none of these

Question

Quizplus · Accepted Answer

If the interest rate on debt is higher than ROA, it means that the firm is paying more to borrow money than it is earning through its assets. Therefore, increasing the use of debt in the capital structure will further increase the interest expenses, which will decrease the net income and thus decrease the ROE.

If the Interest Rate on Debt Is Higher Than ROA,then