A company that borrows funds at 6% and then generates a return on those funds of 9% typically has:
A) Greater default risk.
B) Favorable financial leverage.
C) Higher return on equity.
D) All of the other answers are true.

Question

Quizplus · Accepted Answer

A company that borrows at a lower interest rate and earns a higher return on those borrowed funds benefits from favorable financial leverage, which can lead to a higher return on equity. This does not inherently mean greater default risk; in fact, successful leverage can improve financial stability by increasing profits.

A Company That Borrows Funds at 6% and Then Generates