Many corporations finance at least a part of their operations and asset purchases using debt, principally because the cost of debt financing is cheaper than equity financing.

Moreover, some firms are able to use leverage more effectively than others—that is, the returns to shareholders as a result of financing with debt are higher for some firms than for other firms. Using the ROE model,discuss when the use of financial leverage is most effective and least effective. When should a firm stop using debt to finance its operations or asset purchases?