CFA Practice Question

There are 191 practice questions for this study session.

CFA Practice Question

If a company issues debt and then uses the proceeds to repurchase some of its outstanding shares, its ROE will likely ______ (keeping other things constant).
A. decrease
B. remain the same
C. increase
Explanation: This will increase the company's leverage and make its equity riskier.

User Contributed Comments 5

User Comment
janmilly1 Why riskier? ROE = ni/ebt * ebt/ebit * ebit/rev * rev/assets * assets/equity. Which of these variables will grow?
birdperson jan -- you buy back shares --> equity goes down --> return/equity goes up.
Lambo83 It should stay the same.

ROE = ROA x Financial Leverage: ROE = (NI/Assets) x (Assets/Equity).

More debt increases assets so ROA declines.

More debt reduces equity and increases assets so Financial Leverage increases.

Therefore the effects of ROE could go up or down.

Answer B is correct I'm sure
Dabuya @Lambo83: more debt and less equity does not increase assets, so ROA stays the same. The financial leverage increases so ROE will increase.
renataa Birdperson and Dabuya are spot-on!
You need to log in first to add your comment.