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What going to happen with ROA and ROE if a company wants to do restructure of...

What going to happen with ROA and ROE if a company wants to do restructure of capital like make a bigger d/e ratio? Why? By which details?

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Answer #1

There can be different probable scenarios when the company is increasing the overall debt to equity ratio.-

A.when the overall cost of capital of the company is lower than the rate of return of the company, then increasing of proportion of debt into the overall capital structure, will increase the return on asset and it can also increase the return on equity.

B. When overall rate of return of the company is lower than the cost of capital of company, it means that the company is not able to cover with the cost of capital so addition of more debt capital to the overall capital structure would mean that it will lose on the interest payments and there would be decrease on the return of the Assets of the company and their will also be decrease on the return on equity of the company.

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