Final answer:
Leverage affects the relationship between ROAA and ROE; it can either increase or decrease the impact of changes in ROAA on ROE, depending on whether leverage is increased, which amplifies the effect, or decreased, which reduces the effect. So, the correct option is e) Any of either (a) or (b) or (c) above are possible.
Step-by-step explanation:
Leverage affects the relationship between Return on Average Assets (ROAA) and Return on Equity (ROE). Leverage can either exacerbate or diminish the relationship between ROAA and ROE depending on how it is used.
If a company takes on more debt relative to its equity, leverage increases, which amplifies the effects on ROE when ROAA changes. Conversely, when leverage is decreased, the impact of changes in ROAA on ROE is reduced.
Leverage involves using borrowed capital (debt) for investing with the aim of increasing the potential return of an investment.
An increase in leverage means that a company is using more debt relative to its equity. This can increase the impact of the company's ROAA on its ROE because the earnings generated from the assets (ROAA) are spread over a smaller equity base, thus potentially increasing ROE.
However, if the assets generate a lower return than the cost of debt, this can detrimental to the ROE.
On the other hand, if a company reduces its leverage, it means it is using less debt relative to its equity. This can decrease the impact of ROAA on ROE, as the earnings are spread over a larger equity base, resulting in a less pronounced effect on ROE.
Therefore, the effect of leverage on the relationship between ROAA and ROE depends on whether it is increased or decreased.
So, the correct option is e) Any of either (a) or (b) or (c) above are possible.