Other things held constant,the more debt a firm uses,the lower its return on total assets will be.

Question

Quizplus · Accepted Answer

This statement is a generalization of the financial principle known as the "pecking order theory," which suggests that a firm will first use internal financing (retained earnings) before turning to debt financing. This theory postulates that debt financing is considered a "last resort" due to its associated costs (e.g., interest payments, bankruptcy risk). As a result, the more debt a firm uses, the greater its financial risk and, therefore, the lower its return on total assets.

Other Things Held Constant,the More Debt a Firm Uses,the Lower