Why is accelerated depreciation increase NPV, compared to straight line? Why is use of debt reduce net income but increase ROE? Why is use of debt increase the rate of change in ROE? Thanks!
accelerated depreciation has a higher depreciation than straight line. so effectively you pay less taxes or in other words have more cash flows. leads to increase in NPV Use of debt increases “required” ROE, as the leverage increases, the equity investors want to be compensated for the leverage.
On ROE, use of debt increases D and reduces E, so you have a smaller equity, hence increasing ROE.
Dreary Wrote: ------------------------------------------------------- > On ROE, use of debt increases D and reduces E, so > you have a smaller equity, hence increasing ROE. I think whether additional usage of debt would make ROE higher depends on the level of Net Profit Margin and should not be taken for granted, because DuPont Analysis also has the net profit margin in it and higher interest expense lowers net profit (while increasing debt to equity). So there are offsetting impacts.
You’re right about the offsetting effect, but ROE will increase, because your leverage increases in DuPont as well, the A/E part.