Question

Which of the following statements are true? A. The creditors of a firm must be satisfied before any earnings can be distributed to the common shareholders.B. The more financial leverage that a firm uses, the greater will be its risks and expected return.C. When referring to ratio comparisons, time-series analysis compares a firm to that of an industry leader.D. Earnings per share is calculated by dividing retained earnings by the number of shares of common stock outstanding.E. The operating profit margin must take into account interest and taxes.

Answer 1

Answer: .B. The more financial leverage that a firm uses, the greater will be its risks and expected return

Step-by-step explanation:

Financial leverage measures how much debt a company is using in acquiring assets. A high financial leverage means that the company is insuring more debt which means that the company has a higher risk attached.

The company will also have a higher expected return as they will have to pay off the debt that they used. Higher financial leverage also leads to more volatility in earnings.