Many companies use high levels of debt to finance their assets because of financial leverage benefits provided to investors when return on assets exceeds the after tax cost of interest.

Question

Quizplus · Accepted Answer

This statement is true. Financial leverage can help increase returns for investors as long as the return on assets is higher than the after tax cost of interest. However, it also increases the level of risk for the company as a high level of debt can lead to financial distress if the company is unable to meet its debt obligations.

Many Companies Use High Levels of Debt to Finance Their