Although Hargrove Co. makes enough money to pay for everything it needs, it still chooses to have some debt and pay a larger portion of retained earnings back to the stockholders. What is likely the best explanation for this decision?
A) Reduced interest rate
B) Financial leverage
C) Return multiplier
D) Equity leverage
E) Debt multiplier

Question

Quizplus · Accepted Answer

Hargrove Co. is opting for financial leverage, which means using debt to finance its operations and investments. This may increase the company's return on equity if the cost of borrowing is lower than the return on investment. Additionally, paying out a larger portion of retained earnings may be a signal to investors that the company is financially stable and profitable, which could attract more investment.