Financial leverage decreases a firm's ROE and EPS under which of the following circumstances? A) ROCE cost of debt B) ROCE = cost of debt C) ROA = after tax cost of equity D) ROCE

Question

Financial leverage decreases a firm's ROE and EPS under which of the following circumstances?
A) ROCE > cost of debt
B) ROCE = cost of debt
C) ROA = after tax cost of equity
D) ROCE < after tax cost of debt

Quizplus · Accepted Answer

When the return on capital employed (ROCE) is less than the after-tax cost of debt, the firm is not generating enough returns to cover the cost of its debt, leading to a decrease in both return on equity (ROE) and earnings per share (EPS).

Financial Leverage Decreases a Firm's ROE and EPS Under Which