Chart 42 Positive and Negative Leverage Leverage is a double-edged sword. It can magnify gains, or magnify losses. Positive leverage occurs only when the return on borrowed funds is greater than the cost of the debt (debt yield). Negative leverage occurs when the return is less than the cost of debt. In this analysis we do not know, exactly, the return on borrowed funds so the average return for all assets is used. Thus, if the Return on Assets is greater than the cost of debt, then the leverage is considered positive and that would mean Return on Assets is being leveraged to improve Return on Equity. Conversely, if ROA is less than the cost of debt, then the leverage is considered to be negative and in that case ROA is being leveraged, but it is reducing ROE. 2019 4.5% 4.00% 4.5% 4.4% 4.3% 4.2% 4.1% 4.0% 3.9% 3.8% 3.7% ROA (EBIAT) Cost of Debt Q26. Positive and Negative Leverage conclusion: a. The firm is positvely leveraged; increasing leverage will increase ROE b. The firm is negatively leveraged; increasing leverage will decrease ROE. The primary problem is low ROA c. The firm is negatively leveraged; increasing leverage will decrease ROE. The primary problem is the high Cost of Debt d. Not applicable (the firm is not leveraged) Performance Structure Economic Profit Planning Sheet Economic Prolit (Plan Section! Survey Survey