A company that uses a significant amount of borrowed funds to finance its assets will always achieve a higher percentage return for its owners than a company that uses no borrowed funds, provided the assets generate any positive return.
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A company's total assets are valued at $1,000,000. This is financed using $200,000 of the owners' own capital and $800,000 of borrowed funds. If the total value of the company's assets falls by 15%, what is the resulting percentage loss on the owners' initial capital? (For simplicity, ignore interest payments on the borrowed funds).
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A company that uses a significant amount of borrowed funds to finance its assets will always achieve a higher percentage return for its owners than a company that uses no borrowed funds, provided the assets generate any positive return.
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