better view this way

ROE = (net income)/equity

ROE = (net income)/(asset - liability)

ROE = ((net income)/asset)*(asset/(asset - liability))

ROE = ROA * Leverage

see, a higher proportion of debt in the capital structure leads to higher ROE. Financial leverage benefits diminish as the risk of defaulting on interest payments increases.

So if you take on too much debt, the cost of debt rises as creditors demand a higher risk premium, and ROE decreases. Increased debt will make a positive contribution to the ROE only if the matching Return on assets (ROA) of that debt exceeds the interest rate on the debt.

所有跟帖： 

• 安地主的补充解释说得明白，谢谢！ -万枫- ♂ (0 bytes) () 08/18/2010 postreply 09:10:23

• thanks for your good article -安得广厦几十间- ♀ (0 bytes) () 08/18/2010 postreply 09:17:10

• 你说的都对，但residential mortgage is fixed term -Conehead- ♂ (72 bytes) () 08/18/2010 postreply 12:40:22