The Volatility of A Firms Assets and The Leverage Effect
There is one question. ( I don’t need a very much detail answer) (200 – 250 words).
The intuition behind the benefits of financial leverage is that a firm can borrow funds that bear a certain interest rate but invest those funds in assets that generate returns in excess of that rate. Why would firms with high ROAs not keep leveraging up their firm by borrowing and investing the funds in profitable assets?