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:

Cost-output Elasticity

The ratio of the percentage change in cost relative to the percentage change in output, indicating how costs change with output levels.

Marginal Cost

The cost associated with producing one additional unit of a product.

Technological Change

Development of new technologies allowing factors of production to be used more effectively.

Isoquant

A curve representing all the combinations of inputs that yield the same level of output.