An industrial company has Total Assets amounting to €2,500,000 and Long-term Debts of €1,500,000. It has no short-term debts. Last year, the company generated a Gross Margin (before interest) of €200,000. The interest rate on their debt is a flat 4%.
Assuming Assets = Equity + Debt, what is the company's Return on Equity ( RoE ), and is the financial leverage effect currently acting positively or negatively?

Question

Answer

RoE  = 14.0%; The leverage effect is negative because Debt is greater than Equity.

Answer

RoE = 8.0%; The leverage effect is negative because the  RoI  (8%) is less than the debt interest rate (4%).

Answer

RoE  = 5.6%; The leverage effect is positive because the Net Margin covers the interest.

Answer

RoE  = 14.0%; The leverage effect is positive because the  RoI  (8%) is greater than the debt interest rate (4%)

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