Question

A firm increases its debt ratio from 50% to 75%. Which of the following statements is most correct:A. the firm probably has very low borrowingB. the firm’s positive ROE will increaseC. the stockholders’ leverage has decreased

Answer 1

The correct answer is (B)

Step-by-step explanation:

Companies use different financing methods to fund their investment projects. Some companies use more debt and some offer their share. When a company increase its debt ratio it means that in future the company roe will increase, because equity shrinks. Return on equity of a company increase with respect to return on assets. Overall, more debt ratio will increase positive roe.