Explanation:
If the cost of borrowing is less than the return on assets, it is financially viable for the bank to borrow additional funds and proceed with its expansion plan. This is because the return on the new assets generated from the borrowed funds will exceed the cost of the debt, thereby generating a positive net return and increasing overall profitability.
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Q.2288 Barakuda is considering borrowing additional funds to in order to finance an ambitious expansion plan. In what circumstances would it be appropriate for the bank to borrow funds and go ahead with its plan?
A
If its return on assets is equal to expenses of additional borrowing.
B
If the cost of borrowing equals the expenses of the existing borrowing.
C
If the cost of borrowing is less than the return on assets.
D
If the total value of existing assets is less than the total value of existing debt.
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