If the return on total assets ratio is substantially below the cost of borrowing, ordinary shareholders 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 means that the company is not generating enough profits to cover its borrowing costs. In this scenario, a high debt ratio will increase interest expenses, which would negatively affect ordinary shareholders. Therefore, a low debt ratio would be more beneficial in this situation.

If the Return on Total Assets Ratio Is Substantially Below