As companies increase leverage,
A)the difference between the return on assets ratio and the return on common shareholders' equity ratio will not change.
B)the difference between the return on assets ratio and the return on common shareholders' equity ratio will narrow.
C)the difference between the return on assets ratio and the return on common shareholders' equity ratio will widen.
D)there will be no difference between the return on assets ratio and the return on common shareholders' equity.

Question

Quizplus · Accepted Answer

As companies increase leverage, the use of debt financing increases the potential return to shareholders, which widens the difference between the return on assets (ROA) and the return on common shareholders' equity (ROE) because ROE reflects the use of leverage to finance assets, whereas ROA does not.

As Companies Increase Leverage