If Alex Corporation Takes Out a Bank Loan to Purchase

question 15

Multiple Choice

If Alex Corporation takes out a bank loan to purchase a machine used in production and everything else stays the same,its equity multiplier will ________,and its ROE will ________.

• A)increase;increase
• B)decrease;decrease
• C)increase;decrease
• D)decrease;increase

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Definitions:

Depreciation Method

A methodical strategy for distributing the expense of a physical asset across its lifespan.

Straight-line Method

A method of allocating an asset's cost evenly over its useful life for the purposes of calculating depreciation.

MACRS

Modified Accelerated Cost Recovery System, a method of depreciation for tax purposes that allows faster depreciation in the initial years of an asset's life.

Equipment

Tangible assets used in operations, such as machinery or computers, that have a useful life beyond one accounting period.