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Return on Equity and Leverage

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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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Solution Summary

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

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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 ...

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