When earnings are less than the cost of debt,it follows that the more debt,the lower the percentage of earnings available for distribution to shareholders.

Question

Quizplus · Accepted Answer

If earnings are less than the cost of debt, it means the company is not generating enough profits to cover its debt obligations. As a result, the more debt the company takes on, the greater the proportion of its earnings that will have to be used to service the debt, leaving less available for distribution as dividends to shareholders. This is known as the "interest coverage ratio," and a lower ratio indicates greater financial risk for the company.

When Earnings Are Less Than the Cost of Debt,it Follows