Question

Financial leverage_________.

I. increases expected ROE but does not affect its variability.
II. increases breakeven, like operating leverage, but increases the rate of earnings per share growth once breakeven is achieved.
III. is a fundamental financial variable affecting sustainable growth.
IV. increases expected return and risk to owners.
A) I and II only.
B) I and III only.
C) II and IV only.
D) II, III, and IV only.
E) I, II, III, and IV.
F) None of the above.

Answer 1

D) II, III, and IV only.

Step-by-step explanation:

Financial leverage arises when a company uses levered funds that is debt funds to finance the assets needed by the company.

In this manner the cost of equity increases, but the cost of debt helps in increasing the Earnings per share.

It in any manner increases the cost of operating as debt provides for cost of interest to be paid, which is not avoidable.

It is a financial cost as it provides finance to the company, and the charges in the form of interest even provide for tax benefit.

This, after increasing the operating cost increases the expected return of the equity holders, also the risk is increased with increased cost of operating the business.