Question
 Which of the following causes of an increase in
return on equity is most likely a positive sign for a firm’s equity investors?Solution
When net income is increasing more than the book value of equity, return on equity (ROE) will increase at a faster rate. This is a positive sign for investors. When firm issues fresh debt, it comes under an obligation to pay interest expenses, and that are paid out of profits, this decreases the ROE and is not a positive sign for investors.
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