medium · Principles of Finance cost-of-capital-structure

Using the 5-way DuPont decomposition, which of the following best describes a scenario where ROE remains constant despite a significant increase in Interest Expense?

1. The Tax Burden ratio increased because the interest expense provided a larger tax shield.
2. The Equity Multiplier decreased, signifying that lower leverage compensated for higher borrowing costs.
3. The Interest Burden ratio decreased, but was perfectly offset by an increase in the Operating Margin or Asset Turnover.
4. The Asset Turnover increased, but this only measures volume and cannot mathematically offset financing costs.

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