6 borrowing might lever up the return on common equity when

6. borrowing might lever up the return on common equity when A) the cash from issuing debt is invested earn at a rate equal the borrowing cost of the debt B) the cash from issuing debt is invested earn at a rate greater than the borrowing cost of the debt C) the cash from issuing debt is invested earn at a rate lower than the borrowing cost of the debt D) borrowing has no effect on the return on common equity 7. Which of the following statements is correct? A. Net operating profit margin divided by net operating asset turnover equals return on net operating assets B. Return profit margin and leverage C. Return on equity equals return on net operating assets less interest, net of tax on net operating assets can be disaggregated into net operating D. Return on equity can be disaggregated into net operating profit margin, net operating asset turnover and leverage. 8. The residual income model defines stock price as book value plus the present value of residual income. What is the effect on stock price in a given period if the firm\'s cost of capital is greater than its return on equity? A. Cannot be determined B. No effect C. Stock price increases D. Stock price decreases 9. If a company is to successfully remain in business over the long haul, which of the following statements is most correct? A. Total cash flow from operations, measured over an extended period, must be greater than zero B. Total cash flow from investing, measured over an extended period, must be positive C. Total cash flow from financing, measured over an extended period, should be negative D. Total cash flow from financing plus total cash flow from investing, measured over an extended period, must be positive.

Solution

Answer to Question 6: The borrower may lever the equity when the cash that is received through debt is invested in investment that gives higher returns and the debt service rate is lower compared to the return on investment. Therefore the correct option is (B) .