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When can a high debt to equity ratio be positive for a company’s financial health and share price
| A) | If the earnings growth the borrowed money generates is higher than the cost to borrow the money |
| B) | If the company has a low base of fixed assets |
| C) | If the earnings growth the borrowed money generates is lower than the cost to borrow the money |
| D) | If the company does not borrow funds at all |
Expert Answer
A. If the earnings growth the borrowed money generates is higher than the cost to borrrow the money.
For example, if the return on assets is 8 %, and the cost of debt is 6%, it would be a positive for the company’s health and its share price.
