Answer:
The statement the the Return on Equity will decline is False.
Explanation:
The following terms can be defined as follows;
1. Debt
Debt can be defined as money that is owed. It is a financial obligation that is due. In a firm that is in business, debt can be defined as money that is borrowed from a financial institution like a bank. Firms usually borrow loans with a promise to pay back in the future, usually with interest involved. Debt if invested carefully can help a company grow, however, if misused it can lead to negative consequences like default. When debt is overused, the liabilities outweigh assets.
2. Interest cost
Interest cost is the additional cumulative amount that a borrower pays to the lender to cover the lenders risk and operational costs. The interest cost is a function of the debt. An increased debt obligation usually increases the interest costs.
3. Profit margin
The profit margin can be defined as the amount of revenue less the total expenditure. Expenditure includes; operational costs of running the business and interest costs. It therefor means that increasing interest costs leads to a reduction in the profit margin.
4. ROE
Return on Equity is a measure of financial performance, calculated by dividing the net income by the shareholder's equity. The net income is total expenditure subtracted from the total revenue, and the shareholder equity is calculated by subtracting total debt from the assets. Therefor an increase in debt reduces the total shareholder's equity which in turn increase the return on equity. The above statement is therefor false.
