[amp_mcq option1=”Fixed cost of production” option2=”Variable cost” option3=”Interest cost” option4=”None of the above” correct=”option3″]<\/p>\n
The correct answer is: C. Interest cost.<\/p>\n
Financial leverage is the use of borrowed money (debt) to finance the purchase of assets. This can increase the potential return on investment for the owners of the business, but it also increases the risk.<\/p>\n
When a company borrows money, it has to pay interest on the loan. This interest expense is a fixed cost, which means that it does not change with the level of production or sales. If a company’s sales increase, its profits will increase. However, if its sales decrease, its profits will decrease by even more, because it will still have to pay the same amount of interest on its loans.<\/p>\n
This is why financial leverage is often referred to as a “double-edged sword.” It can increase the potential return on investment, but it also increases the risk. Companies need to carefully consider the risks and rewards of financial leverage before deciding whether or not to use it.<\/p>\n
A. Fixed cost of production is not the correct answer because it is not a factor that affects financial leverage. Fixed costs are costs that do not change with the level of production or sales. They include costs such as rent, depreciation, and insurance.<\/p>\n
B. Variable cost is not the correct answer because it is not a factor that affects financial leverage. Variable costs are costs that change with the level of production or sales. They include costs such as raw materials and labor.<\/p>\n
D. None of the above is not the correct answer because financial leverage is a factor that is affected by interest cost.<\/p>\n","protected":false},"excerpt":{"rendered":"
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