A firm increases its financial leverage when its ROA is greater than the cost of debt.Everything else equal this change will probably increase the firm's _______.
I.beta
II.earnings variability over the business cycle
III.ROE
IV.stock price
A) I and II only
B) III and IV only
C) I, III and IV only
D) I, II and III only

Question

Quizplus · Accepted Answer

Increasing financial leverage when ROA is greater than the cost of debt will likely increase the firm's beta (risk), earnings variability over the business cycle, and ROE due to the amplified effects of leverage on returns.

A Firm Increases Its Financial Leverage When Its ROA Is