A Firm Has a Debt Ratio of 40 Percent

question 75

Multiple Choice

A firm has a debt ratio of 40 percent.Currently,it has interest expense of $500,000 on $5,000,000 of total debt outstanding,and a tax rate of 40 percent.If the firm's ROA is 6 percent,by how many percentage points is the firm's ROE greater than its ROA?

• A) 0.0%
• B) 4.0%
• C) 5.8%
• D) 7.4%
• E) 10.0%

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Definitions:

Recency Effect

The tendency to better remember information that is encountered last in a series.

Salience Effect

Refers to the tendency of individuals to focus on items or information that stand out more noticeably or are more significant to them.

Depth of Processing

A theory suggesting the depth (shallow to deep) of mental processing affects memory recall; deeper processing leads to better recall.

Retroactive Interference

The phenomenon where newly learned information interferes with the recall of information learned previously.