Phylx Company earned an 8 percent return on its total assets. Current liabilities are 5 percent of

Question:

Phylx Company earned an 8 percent return on its total assets. Current liabilities are 5 percent of total assets. Long-term bonds carrying a 5.5 percent coupon rate are equal to 30 percent of total assets. There is no preferred stock. Is this application of leverage favorable or unfavorable from the viewpoint of Phylx’s stockholders?

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