The effect of financial leverage on ROE depends on:
A) the firm's financing strategy.
B) the amount of dividends paid out.
C) the market value of the debt.
D) none of the above.

Question

Quizplus · Accepted Answer

The effect of financial leverage on ROE depends on the firm's financing strategy because different financing strategies use different levels of debt to equity ratio, which affects the amount of interest payments, net income, and ultimately ROE. The amount of dividends paid out and the market value of debt may also affect ROE indirectly, but they are not the primary drivers of the relationship between financial leverage and ROE.

The Effect of Financial Leverage on ROE Depends On