Other things held constant,the more debt a firm uses,the lower the firm's return on total assets will be.

Question

Quizplus · Accepted Answer

This statement is true because when a firm uses more debt, it increases its financial leverage, which magnifies the effects of changes in earnings on the return on total assets. Therefore, if earnings increase, the return on total assets will increase, but if earnings decrease, the return on total assets will decrease even more. As a result, the more debt a firm uses, the higher the risk of its returns being adversely affected.

Other Things Held Constant,the More Debt a Firm Uses,the Lower