If the Interest Rate on Debt Is Lower Than ROA

question 12

Multiple Choice

If the interest rate on debt is lower than ROA, then a firm will __________ by increasing the use of debt in the capital structure.

• A)increase the ROE
• B)not change the ROE
• C)decrease the ROE
• D)change the ROE in an indeterminable manner If ROA is higher than the interest rate, then ROE will increase by an amount that depends on the debt to equity ratio.

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Definitions:

Income Statement

A financial report summarizing revenue, expenses, and profits over a given period, highlighting a company’s financial performance.

Balance Sheet

A financial statement that shows the assets, liabilities, and owner’s equity of an entity at a specific point in time, reflecting the financial position.

Total Liabilities

The sum of all financial obligations or debts a company owes to external parties.

Capital

Financial resources or assets owned by a business, used to fund its operations and growth.