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    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?

    A Net income is increasing at a faster rate than the book value of equity Correct Answer Incorrect Answer
    B Net income is decreasing at a faster rate than the book value of equity Correct Answer Incorrect Answer
    C A firm issues fresh debt Correct Answer Incorrect Answer
    D All of the above Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    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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