Increase in return on Equity

CFA Level I Equities
#1

Which of the following causes of an increase in return on equity is most likely a positive sign for a firm’s equity investor?

a) A firm issues debt to repurchase equity

b) Net income is increasing at faster rate than book value of equity

c) Net income is decreasing at a slower rate than book value of equity.

I chose A) because hypothetically, if a firm is repurchasing equity by taking on more risk, it signals to me that managers are expecting to do better. Real-world example is Dell and EMC. Dell took on debt to buy EMC.

I didn’t like B because NI can go up by, say, selling assets, which might not be good for the investors in the long run.

OA is B. Can someone please explain why OA is correct and why my thinking about B) is wrong? I’d appreciate any thoughts.

#2

For me there is more useful actions with issuing debt than repurchasing equity. Also if you issue debt net income will decrease in subsequent period due to principal payment which will decrease your ROE.

In your example you refer to a Leverage Buy Out which is different from repurchasing equity.