Return on shareholders' equity is increased if a firm can maintain its return on assets but increase its leverage.

Question

Quizplus · Accepted Answer

Return on shareholders' equity is calculated by dividing net income by shareholders' equity. If a firm maintains the same return on assets but increases its leverage, it can potentially increase its net income (due to the tax shield effect of debt) and therefore increase its return on shareholders' equity.

Return on Shareholders' Equity Is Increased If a Firm Can