True or false: As long as a firm is certain that the return on assets will be higher than the interest rate, an issue of debt is better for shareholders.
Sneakily tricky imo, by increasing debt it makes the return on equity increase, but at a higher risk. But, the return on debt is higher than the return on assets! How would you think about this?
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If you had 100% confidence that ROA is sufficient to cover interest rate, yes you'd want to issue more debt, boosting ROE. However, this question is highly theoretical as I'm sure you know - If this is an interview question, be sure to acknowledge that returns are dynamic and can't be predicted with absolute certainty.
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