If a company's return on assets is substantially lower than its cost of borrowing, then the common stockholders would normally want the company to have a relatively high debt/equity ratio.

Question

Quizplus · Accepted Answer

If a company's return on assets is substantially lower than its cost of borrowing, then adding more debt through a high debt/equity ratio would increase the risk of default and bankruptcy, which would negatively impact the common stockholders. They would instead want the company to focus on improving its return on assets and reducing its borrowing costs.

If a Company's Return on Assets Is Substantially Lower Than