Question: An increase in financial leverage increases return on common equity (if the operating spread is positive), and thus increases residual earnings. The value of equity

An increase in financial leverage increases return on common equity (if the operating spread is positive), and thus increases residual earnings. The value of equity is based on forecasted residual earnings, yet it is claimed that the value of equity is not affected by a change in financial leverage. How is this seeming paradox explained?

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