Question

Financial Risk Do you think 54% return for the levered firm's shareholders is better than 30% return for the unlevered shareholders? Why? Why not?

Answer 1

You just can't look returns at standalone .

It's better if company is able to meet its debt repayments and has healthy financial statements so as to meet its future debt liabilities. In this case having debt on company and providing higher return is good.

But if it seems company might not be able to meet its liabilities in near future, in that case debt shareholders priority comes first over assets than equity shareholders and in this case you won't be getting your desired return.

It's true that higher returns comes with leverage but then it should be looked that is company able to meet its debt liability.