Firms should stop borrowing funds

Question

Quizplus · Accepted Answer

Firms should continue to borrow funds as long as the Marginal Revenue Product (MRP) of borrowed funds is higher than the cost of borrowing. This means that the firm is earning more from investing the borrowed funds than it is paying in interest. However, if the MRP is equal to the cost of borrowing, then the firm should stop borrowing as it is not gaining any additional benefit. The other options are not good criteria for determining when to stop borrowing funds. The bank raising interest rates or having a gloomy future may not necessarily mean that the cost of borrowing is too high, and having debt higher than 25 percent of the value of the firm is not a universally applicable benchmark for all firms.

Firms Should Stop Borrowing Funds