The financial structure of a firm refers to the way the firm’s assets are divided by...

The financial structure of a firm refers to the way the firm’s assets are divided by equity and debt, and the financial leverage refers to the percentage of assets financed by the debt. In a published paper, Tai Ma of Virginia Tech claims that financial leverage can be used to increase the rate of return on equity. To say it is another way, stockholders can receive higher returns on the equity with the same amount of investment by the use of financial leverage. The following data show the rates of return on equity using 3 different levels of financial leverage and a control level (zero debt) for 24 randomly selected firms
Financial Leverage
Control       Low      Medium        High
2.1               6.2          9.6           10.3
5.6                4.0          8.0             6.9
3.0               8.4          5.5             7.8
7.8               2.8         12.6            5.8
5.2               4.2           7.0            7.2
2.6               5.0           7.8           12.0
Compare the mean rates of return on equity at the different levels of financial leverage. Which of them are significantly different?

Expert Solution

orchestra answered 1 year ago

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