David Is Trying to Decide Whether to Add Capital Through

question 109

Multiple Choice

David is trying to decide whether to add capital through investing more of his own money or through borrowing money from the bank. To help him decide, you remind him that as long as his firm's rate of return on its assets is greater than the cost of the debt, his rate of return on equity will _____ as the firm uses more debt.

• A) decrease
• B) increase
• C) remain the same
• D) fluctuate

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Definitions:

Marginal Utility

The added gratification or usefulness experienced from the consumption of an additional unit of a good or service.

Risk-Averse

A characteristic of preferring to avoid risk, often leading to choices that have lower potential returns to minimize possible losses.

Income

Income is the financial earnings received by an individual or entity, typically measured in terms of money earned from employment, investments, or business operations.

Risk-Averse

A descriptive term for an individual or entity that prefers to avoid risk and chooses certainty over uncertainty when making investment or financial decisions.