Question

When return on assets R_A = 10% and the cost of debt R_D = 5%, then increasing leverage would result in:

1. An increase in the company’s EPS and ROE
2. A decrease in the company’s EPS and ROE
3. No impact on company’s EPS and ROE

Answer 1

When the return on assets is higher than the the cost of debt, it will mean that the differential amount will be leading to growth of the company, and growth of the company will be meaning that it would lead into tl increase in the return on equity, because the Earning per share has increased.

when the companies earning has increased, it will mean that the Earning per share has increased and it will lead to a substantial increase in the return on equity percentage.

Rest of the statements are false because they are stating otherwise.

Correct answer is option ( A)an increase in the company's Earning per share and return on equity.