As Companies Increase Leverage

question 98

Multiple Choice

As companies increase leverage,

• A)the difference between the return on assets ratio and the return on common shareholders' equity ratio will not change.
• B)the difference between the return on assets ratio and the return on common shareholders' equity ratio will narrow.
• C)the difference between the return on assets ratio and the return on common shareholders' equity ratio will widen.
• D)there will be no difference between the return on assets ratio and the return on common shareholders' equity.

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Definitions:

Strengths and Weaknesses

An analysis or assessment of the positive (strengths) and negative (weaknesses) internal aspects of an organization.

Straight-Line Depreciation

A system for spreading out the cost of a tangible asset in equal yearly amounts across its functional life.

Average Rate of Return

A financial metric used to evaluate the profitability of an investment, calculated as the average annual profit divided by the initial investment cost.

Annual Income

The total earnings or revenue generated by an individual or business in one fiscal year before any deductions.