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 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 cost of debt is typically lower than the cost of equity, so the firm can borrow funds at a lower rate and invest in projects that earn a higher return, thus increasing ROE. However, if the firm earns a lower return than the rate paid on debt, the use of debt will decrease ROE. Therefore, option C is the best choice as it aligns with the principle of using debt to increase ROE.

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