If a company's return on total assets is higher than its return on common stockholders' equity, a company is using financial leverage effectively.

Question

Quizplus · Accepted Answer

If a company's return on total assets is higher than its return on common stockholders' equity, it indicates that the company is using more debt financing and financial leverage. This does not necessarily mean that the company is using financial leverage effectively, as higher debt levels also bring higher interest expenses and financial risks. Effective financial leverage involves balancing the benefits and risks of using debt financing to maximize shareholder returns. Therefore, the statement is false.

If a Company's Return on Total Assets Is Higher Than