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In this example, what would lead to an increase in the price of the firm's stock?

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Suppose a firm used a debt to leverage up its ROE, and in the process its EPS also was boosted. Would this lead to an increase in the price of the firm's stock?

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In the short run, the stock price would remain unaffected, but in the long-run, excessive debt financing would increase the business risk.

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Solution provided by:
Manal Elkhoshkhany, MBA
Education
  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
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