Reading 11- LOS D : Q1 capital, another, including, interested, class

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1.Joe Harris is interested in why the returns on equity differ from one company to another. He chose several company-specific variables to explain the return on equity, including financial leverage and capital expenditures. In his model:

A)   return on equity is the independent variable, and financial leverage and capital expenditures are dependent variables

B)   return on equity is the explanatory variable, and financial leverage and capital expenditure are the explained variables.

C)   return on equity is the dependent variable, and financial leverage and capital expenditures are independent variables.

D)   return on equity, financial leverage, and capital expenditures are all independent variables.

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The correct answer was C)

The dependent variable is return on equity. This is what he wants to explain. The variables he uses to do the explaining (i.e., the independent variables) are financial leverage and capital expenditures.