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Suppose Two Firms with the Same Amount of Assets Pay

question 14

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Suppose two firms with the same amount of assets pay the same interest rate on their debt and earn the same rate of return on their assets,and that ROA is positive.However,one firm has a higher debt ratio.Under these conditions,the firm with the higher debt ratio will also have a higher rate of return on common equity.

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Definitions:

Proxy

A person authorized to act on behalf of another, especially in voting at a shareholders' meeting.

Board Meeting

A formal gathering of the board of directors of an organization, company, or corporation to discuss and decide on company policy and management issues.

Liable

Being legally responsible or obligated.

Sarbanes-Oxley Act

A U.S. federal law that aims to protect investors by making corporate disclosures more reliable and accurate, enhancing financial transparency and accountability.

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