Question

Although the use of financial leverage (debt financing) can increase the return to the owners of a business, it also increases the riskiness of their equity investment.

A. True
B. False

Answer 1

True

Step-by-step explanation:

Once the company starts taking loans to fund its investment their financial risk starts growing which is only beared by the Shareholders not by the bond holders. This additional risk faced by the ordinary share investors means that now they will require additional return. Remember the financial risk only exist if their is the use of leverage or we can say if the financial leverage increases then the financial risk increase. And if the financial risk increases then this additional risk is only beared by the ordinary share investors. Now additional risk beared is the reason why ordinary shareholders means that this has increased the riskiness of their equity investment.