If a firm has a positive tax rate and a positive operating ROA, and the interest rate on debt is the same as the operating ROA, then operating ROA will be ________.
A) greater than zero, but it is impossible to determine how operating ROA will compare to ROE
B) equal to ROE
C) greater than ROE
D) less than ROE

Question

Quizplus · Accepted Answer

Since the firm has a positive tax rate, the interest expense is tax-deductible, which means the after-tax cost of debt is lower than the operating ROA. This results in operating ROA being greater than ROE.

If a Firm Has a Positive Tax Rate and a Positive