Restructuring the liabilities might positively influence the ROE, but will negatively influence the service level of the company agree or disagree?

Expert Solution

The restructuring of debt and liabilities means the payment of all due and unpaid debts by negotiating the interest rate. In the capital structure of a company, equity and liabilities are the two important components. The return on equity or ROE is the financial ratio, which helps in the determination of earning over the capital invested in the company.

The given statement states that "Restructuring the liabilities might positively influence the ROE, but will negatively influence the service level of the company".

The above statement is agreeable. The restructuring of debts and liabilities reduces the interest liabilities for the company. The reduction in the interest liabilities provides more earnings. More earnings provide high ROE or Return On Equity.

The ROE can be determined with the following formula:

ROE = Net earnings are available for unitholders/ Equity Capital.

Hence, the reduction of debt creates a positive impact on ROE.

On the other hand, the reduction in debt capital results in fewer funds to the company. The less flow of funds affects the services of the company. The lack of funds in the form of debt and liabilities indirectly impacts the service level of the company.

Hence, the statement is agreeable.

Junaid answered 1 year ago

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