If the Interest Rate on Debt Is Higher Than the ROA

question 42

Multiple Choice

If the interest rate on debt is higher than the ROA, then by using debt a firm's ROE will ________.

• A) decrease
• B) increase
• C) not change
• D) change but in an indeterminable manner

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Definitions:

Absorption Costing

The accounting methodology that integrates all costs related to manufacturing, including direct materials, direct labor, and both forms of manufacturing overhead—variable and fixed—into a product's total cost.

Variable Costing

A financial tracking method that considers just the variable operating costs (direct materials, direct labor, and variable manufacturing overhead) in the pricing of merchandise.

Unit Product Cost

The overall expense incurred to manufacture a single item, encompassing direct materials, direct labor, and overhead costs.

Absorption Costing

Absorption costing is an accounting method that includes all of the manufacturing costs (direct materials, direct labor, and overhead) in the cost of a product.