Asked by Rebekah Gonzalez on Apr 25, 2024
Suppose that Chicken Express, Inc. has an ROA of 7% and pays a 6% coupon on its debt. Chicken Express has a capital structure that is 70% equity and 30% debt. Relative to a firm that is 100% equity-financed, Chicken Express's net profit will be ________, and its ROE will be ________.
A) lower; lower
B) higher; higher
C) higher; lower
D) lower; higher
E) It is impossible to predict.
ROA
Return on Assets, a financial ratio indicating how profitable a company is relative to its total assets, used to assess how efficient a company's management is at using its assets.
Capital Structure
The combination of borrowing (debt) and ownership (equity) capital employed by a firm to finance its activities and expansion.
Equity-Financed
The method of funding a business through the sale of shares, thus raising capital without incurring debt.
- Assess the impact of financial leverage on a company's net profit and Return on Equity (ROE).
Learning Objectives
- Assess the impact of financial leverage on a company's net profit and Return on Equity (ROE).