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This is true in a perfect market, based on Modigliani-Miller theory of capital structure. In reality, increasing debt to a certain point also increases risk, w
by riccardomc 5y ago
This is true in a perfect market, based on Modigliani-Miller theory of capital structure.
In reality, increasing debt to a certain point also increases risk, which in turn increases return on equity.
- mcguire 5y ago* should increase return on equity. :-)
- rahimnathwani 5y agoA change in return on equity isn't the same as a change in equity. When a company takes a loan, even if that loan is so large as to make insolvency almost inevitable, there is no impact on equity (book value).