In order for a firm to benefit from debt financing, the fixed interest payments must be greater than the operating earnings.

Question

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For a firm to benefit from debt financing, the operating earnings must be greater than the fixed interest payments, so that the firm can generate enough cash flow to cover the debt service. If the fixed interest payments are greater than the operating earnings, the firm may struggle to meet its debt obligations and may face financial distress.

In Order for a Firm to Benefit from Debt Financing