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    Question

    A firm uses 70% debt financing at 10% interest. Its ROE

    rises despite flat operating profits. What explains this phenomenon?
    A Business risk Correct Answer Incorrect Answer
    B Negative leverage Correct Answer Incorrect Answer
    C Financial leverage Correct Answer Incorrect Answer
    D Interest subsidy Correct Answer Incorrect Answer

    Solution

    Increased ROE without rise in EBIT indicates positive financial leverageтАФuse of debt to magnify returns to equity.

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