If a firm's expected return on equity equals its expected return on assets,then the:
A) expected return on debt exceeds the expected return on assets.
B) likelihood of financial distress is high.
C) firm has too much debt.
D) firm has no debt in its capital structure.

Question

Quizplus · Accepted Answer

If a firm's expected return on equity equals its expected return on assets, it implies that the firm has no debt in its capital structure. This is because the expected return on equity includes the effect of both the expected return on assets and the expected return on debt, while the expected return on assets only considers the return generated by the firm's assets. Therefore, if the two returns are equal, there is no expected return on debt, meaning that the firm has no debt in its capital structure.

If a Firm's Expected Return on Equity Equals Its Expected