A company whose rate of return on investments is higher than the interest rate on its debt is said to have
A)unfavourable financial leverage.
B)a sub-optimal capital structure.
C)favourable financial leverage.
D)negative financial leverage.

Question

Quizplus · Accepted Answer

When a company's rate of return on investments is higher than the interest rate on its debt, it means that the company's earnings are exceeding the cost of its debt financing. This situation is known as favourable financial leverage, which means that the use of debt is contributing positively to the company's profitability.

A Company Whose Rate of Return on Investments Is Higher