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 ratio greater than 1.0.

Question

Quizplus · Accepted Answer

The use of debt in the firm's capital structure will increase ROE if the firm earns a higher return than the rate paid on debt. This is because the return on equity (ROE) is calculated as net income divided by shareholders' equity. By using debt, the firm is able to leverage its investment and potentially earn a higher return on investment. However, if the rate paid on the debt is higher than the return earned on investment, then the use of debt will decrease ROE. Therefore, the answer is C.

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