Disadvantage of ROE

This topic has 3 replies, 2 voices, and was last updated 3 years ago by John Moffat.

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August 18, 2022 at 7:24 am #663346
maximus07
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Professor I am unable to get this disadvantage of ROE
“it is sensitive to gearing levels – ROE will increase as gearing ratio increases.”
I am unable to figure connection.
If gearing will increase so finance costs will increase, ultimately, causing drop in Profit Attributable to shareholders. This should decrease ROE so how it is saying increase in gearing increases ROE.
August 18, 2022 at 7:28 am #663350
John Moffat
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I do not know who is saying it or why they are saying it 🙂
August 18, 2022 at 11:38 am #663361
maximus07
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Professor, this disadvantage is written in Kaplan Text.
Thank you.
August 18, 2022 at 12:46 pm #663366
John Moffat
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I do not have the Kaplan text and I do not know the context in which they have written it.
From memory the exam has never asked about disadvantages of ROE – certainly not in the last 15 years!
My lectures cover everything needed to be able to pass the exam well (and if you are watching the lectures you do not really need the Study Text. It is the Exam Kit that is essential, however you choose to study.)
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