Return on equity increases when the expected rate of return from new assets is greater than the interest rate on the bonds issued to finance the assets.

Question

Quizplus · Accepted Answer

Return on equity is calculated as net income divided by shareholders' equity. If the company can finance new assets with bonds at a lower interest rate than the expected rate of return from those assets, the net income from those assets will be higher, increasing the return on equity.

Return on Equity Increases When the Expected Rate of Return