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Part $1$

HighLev Incorporated borrows heavily and uses the leverage to boost its return on equity to$30\%$ this$$ year, nearly$10\%$ higher than the industry average.$$ However, HighLev's stock price decreases relative to its industry counterparts. How is this$$ possible?

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Part $1$

A$.$

The high levels of debt increased the riskiness of HighLev relative to its competitors.

B$.$

The increased debt resulted in interest payments that made$$ HighLev's operating income drop even though return on equity increased.

C$.$

Markets are inefficient and fail to recognize the benefits of leverage.

D$.$

Shareholders are not interested in return on equity.