Explain Why a Reduction in Leverage That Reduces a Firm's

question 18

Essay

Explain why a reduction in leverage that reduces a firm's return on equity (ROE)does not necessarily make an equity investment in the firm less attractive.

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Definitions:

Ratio

A quantitative relationship between two numbers showing how many times the first number contains the second or vice versa.

Unknown Quantity

A variable or value in mathematics and science that is not known but can be solved for in an equation or experiment.

Proportion

A part or segment of a whole, often expressed as a fraction, percentage, or ratio.

3-Month Sales

A measure of the total sales or revenue generated by a company or product within a three-month period.