A Company That Borrows Funds at 6% and Then Generates

question 54

Multiple Choice

A company that borrows funds at 6% and then generates a return on those funds of 9% typically has:

• A) Greater default risk.
• B) Favorable financial leverage.
• C) Higher return on equity.
• D) All of the other answers are true.

---

Definitions:

Call Contract

A financial contract that gives the buyer the right, but not the obligation, to buy an asset or security at a predetermined price within a specific time period.

Premium

The additional amount above the nominal or face value that an investor pays to buy a security or the cost to purchase an insurance policy.

MBI Stock

Refers to the stock of a specific company identified by the ticker symbol MBI, typically requiring further context or identification of the company.

Put Contract

A put contract is a financial agreement giving the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time frame.