If you are looking to maximize your return on equity, would you choose to use leverage...

If you are looking to maximize your return on equity, would you choose to use leverage (a loan)

or not? Why?

Expert Solution

Yes, if I am looking to maximize my return on equity them, I can look for addition of leverage in order to attain higher rate of return on my equity because leverage will always be having the benefit of of interest tax shield, because when we are raising the debt capital, It will mean that interest payment to the debtholders will always be reducing by text detection so the overall cost of debt would be lower and it will mean that the overall return on equity will be higher.

There are some consideration which will be proactively looked into like we will be comparing the return on capital with cost of debt and if the return on capital is higher than the cost of debt,then it will always be better to add more debt to the overall capital structure in order to maximize the return on equity. If the cost of debt is higher than the overall existing rate of return on capital,then we should not be adding debt capital because in that case it will be lowering the overall return on equity.

Hence, it can be summarised that we will be taking the decision after comparing the cost of debt with return on capital.

jeff jeffy answered 2 years ago

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