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MCS,PHD
Argosy University/ Phoniex University/
Nov-2005 - Oct-2011
Professor
Phoniex University
Oct-2001 - Nov-2016
CONCEPTUAL: RETURN ON EQUITY Which of the following statements is most correct? (Hint: Work Problem 4-15 before answering 4-16 and consider the solution setup for 4-15 as you think about 4-16.)
a.       If a firm’s expected basic earning power (BEP) is constant for all of its assets and ex- ceeds the interest rate on its debt, adding assets and financing them with debt will raise the firm’s expected return on common equity (ROE).
b.      The higher a firm’s tax rate, the lower its BEP ratio, other things held constant.
c.       The higher the interest rate on a firm’s debt, the lower its BEP ratio, other things held constant.
d.      The higher a firm’s debt ratio, the lower its BEP ratio, other things held constant.
e.       Statement a is false; but statements b, c, and d are true.
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