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:

Liquid Assets

Assets that can be quickly and easily converted into cash without significant loss in value.

Full Employment Level

An economic condition in which virtually all individuals willing and able to work at prevailing wage rates are employed.

Aggregate Demand

The sum of all demands for goods and services in an economy, measured at a particular price level over a defined time interval.

John Maynard Keynes

An economist from Britain whose concepts revolutionized the field of macroeconomics and also altered the economic policy-making of states.