If the return on total assets ratio is substantially below the cost of borrowing,common stockholders will benefit from a high debt ratio.

Question

Quizplus · Accepted Answer

If the return on total assets ratio is substantially below the cost of borrowing, it indicates that the company is not generating sufficient profits to cover its borrowing costs. In such a scenario, a high debt ratio may lead to financial distress and potentially even bankruptcy, which would not benefit the common stockholders. Therefore, it is not true that common stockholders will benefit from a high debt ratio in this situation.

If the Return on Total Assets Ratio Is Substantially Below