HighLev Incorporated Borrows Heavily and Uses the Leverage to Boost

question 105

Multiple Choice

HighLev Incorporated borrows heavily and uses the leverage to boost its return on equity to 30% this year,nearly 10% higher than the industry average.However,HighLev's stock price decreases relative to its industry counterparts.How is this possible?

• A)Markets are inefficient and fail to recognize the benefits of leverage.
• B)The increased debt resulted in interest payments that made HighLev's operating income drop even though return on equity increased.
• C)Shareholders are not interested in return on equity.
• D)the high levels of debt increased the riskiness of HighLev relative to its competitors.

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