Suppose that Chicken Express,Inc.has a ROA of 7% and pays a 6% coupon on its debt.Chicken Express has a capital structure that is 70% equity and 30% debt.Relative to a firm that is 100% equity-financed,Chicken Express's Net Profit will be ________ and its ROE will be ________.
A)lower, lower
B)higher, higher
C)higher, lower
D)lower, higher
E)It is impossible to predict.

Question

Quizplus · Accepted Answer

Chicken Express's use of debt (leverage) means it pays interest, which reduces net profit compared to a 100% equity-financed firm. However, leverage can increase ROE because the firm is using borrowed funds to potentially generate higher returns on equity.

Suppose That Chicken Express,Inc