For a levered firm, return on equity (rE) is equal to:
A) rE = rA
B) rE = rA + (D/E) * [rA - rB]
C) rE = rA + (D/(D + E)) * [rA - rB]
D) None of the above

Question

Quizplus · Accepted Answer

For a levered firm, the return on equity (rE) is calculated using the formula rE = rA + (D/E) * [rA - rB], where rA is the return on assets, D/E is the debt-to-equity ratio, and rB is the return on debt. This formula reflects the impact of financial leverage on the return on equity.

For a Levered Firm, Return on Equity (RE) Is Equal