If the Interest Rate on Debt Is Lower Than ROA

Multiple Choice

If the interest rate on debt is lower than ROA, then a firm will __________ by increasing the use of debt in the capital structure.

A) increase the ROE
B) not change the ROE
C) decrease the ROE
D) change the ROE in an indeterminable manner If ROA is higher than the interest rate, then ROE will increase by an amount that depends on the debt to equity ratio.