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Return on Equity and Leverage

As EBIT drops, the return on equity (ROE) of a levered firm drops,

1-the same as
2-relatively more than
3- relatively less than
4-more or less than (it cannot be determined)

the ROE of an otherwise identical unlevered firm.

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1-the same as

There are a few important points to select the correct answer in this case. A levered firm considers free cash flow (FCF) to be free cash flow minus interest and principal repayments. An unlevered firm's FCF is calculated ...

Solution Summary

This solution provides the correct answer with explanation to the ROE multiple choice question presented.