Evaluating a Leveraged Financing Decision
A company is considering a $10 million project expected to generate a 9% annual return on the total investment. The company can borrow funds at a 6% annual interest rate. The CEO states, 'To maximize the return for our shareholders, we should finance this project with as much debt as possible. As long as the project's return is higher than the interest rate, more debt is always better.'
Critically evaluate the CEO's statement. Is their reasoning sound and complete for making this financial decision? Justify your position by discussing both the mathematical validity of the statement and any important considerations the CEO might be overlooking.
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Introduction to Macroeconomics Course
Ch.6 The financial sector: Debt, money, and financial markets - The Economy 2.0 Macroeconomics @ CORE Econ
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Evaluation in Bloom's Taxonomy
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