Which of the firms below will have the highest ROE?

To determine which firm will have the highest Return on Equity (ROE), it's essential to understand how leverage impacts a firm's profitability relative to shareholders' equity. Leverage refers to the use of debt to finance the firm's assets. A firm with higher leverage can potentially increase its ROE because it can use borrowed funds to expand operations or invest in projects that yield returns.

In this case, Firm A has a leverage ratio of 2.9, which means it is using a significant amount of debt relative to its equity. This leverage can amplify returns; if the firm generates a profit that exceeds the interest payments on its debt, the return on the equity invested by shareholders will increase.

While Firm B has no leverage, it misses out on the potential benefits of using debt to enhance returns. Similarly, Firm C, with leverage of 1.5, and Firm D, with leverage of 3.5, will also experience different levels of ROE based on their specific profit margins and the cost of their debt. However, Firm D's higher leverage, while it suggests a potential for higher ROE, also carries increased risk. High leverage can lead to greater volatility in earnings, especially during downturns.

In contrast, Firm A's leverage level of