A company that earns a rate of return on its investments lower than the interest rate on its debt is said to have
A) unfavorable financial leverage.
B) a sub-optimal capital structure.
C) favorable financial leverage.
D) negative financial leverage.

Question

Quizplus · Accepted Answer

If a company earns a rate of return on its investments that is lower than the interest rate on its debt, it is not generating enough income to cover its debt obligations. This means the company has to use its own funds to pay off its debt, which reduces its profitability and could lead to financial distress. This situation is known as unfavorable financial leverage.

A Company That Earns a Rate of Return on Its