If the Interest Rate on Debt Is Higher Than ROA

question 88

Multiple Choice

If the interest rate on debt is higher than ROA, 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

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Definitions:

Ordinary Income

Income earned from standard operations of business or through wages, as opposed to capital gains or dividend income.

Interest Income

Earnings received from various types of investments like savings accounts, CDs, and bonds.

Acctrecv.

Short for "accounts receivable," this term denotes money owed to a company by its customers for goods or services delivered but not yet paid for.

Mortgage

A loan secured by the collateral of specified real estate property that the borrower is obliged to pay back with a predetermined set of payments.