header bg

Question:

For a profitable company, issuing debt in order to retire common stock will most likely.

A increase both the level and variability of return on equity.
Explaination

An increase in debt will increase interest expense, which will decrease net income but not operating income, which is calculated before subtracting interest expense. For a profitable firm, the decrease in net income will be offset by the decrease in equity from the repurchase of common stock, so that ROE increases. The effect of the increase in financial leverage will, however, increase the variability of ROE for a given change in operating earnings.