Question

One method to raise ROE suggested by the DuPont Analysis is to raise more debt. However,...

One method to raise ROE suggested by the DuPont Analysis is to raise more debt. However, this method would only be effective if which of the following conditions is satisfied?

Multiple Choice

  • The firm's interest rate must be greater than the risk-free rate.

  • The firm's profit margin is positive.

  • The firm's ROA is greater than the interest rate it must pay on its debt.

  • The firm's equity does not increase more than its debt level.

  • The firm's debt-equity ratio is greater than 1.

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Answer #1

Ans. The firm ROA is greater than the interest rate that it must pay on its debt

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