If a company's bonds bear an interest rate of 8%,its tax rate is 30%,and its assets are generatingan after-tax return of 7%,what would be the leverage?

Question

Quizplus · Accepted Answer

Leverage is considered positive when the return on assets (after-tax) exceeds the cost of debt. Here, the after-tax return on assets is 7%, and the after-tax cost of debt is 5.6% (8%*(1-0.30)). Since 7% > 5.6%, leverage is positive.

If a Company's Bonds Bear an Interest Rate of 8%,its