If the interest rate on debt is lower than ROA,then a firm will __________ by increasing the use of debt in the capital structure.

Question

Quizplus · Accepted Answer

When the interest rate on debt is lower than the ROA, it means that the cost of debt is lower than the returns generated by the assets invested in. Therefore, using more debt in the capital structure will increase the leverage of the firm, leading to an increase in the ROE. This is because the ROE is calculated as Net Income/Equity, and by increasing the amount of debt, the equity portion of the capital structure decreases, leading to a higher ROE.

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