[amp_mcq option1=”Higher Equity” option2=”Higher Debt” option3=”Lower Debt” option4=”Variable Cost” correct=”option1″]<\/p>\n
The correct answer is: A. Higher Equity.<\/p>\n
Financial leverage (FL) is a measure of how much debt a company uses to finance its assets. A higher FL ratio indicates that a company is using more debt to finance its assets, while a lower FL ratio indicates that a company is using more equity to finance its assets.<\/p>\n
Debt is a source of financing that is considered to be more risky than equity. This is because debt holders have a legal claim on a company’s assets, while equity holders do not. If a company goes bankrupt, debt holders will be paid first, before equity holders.<\/p>\n
As a result, companies with higher FL ratios are considered to be more risky than companies with lower FL ratios. This is because companies with higher FL ratios are more likely to go bankrupt if they experience financial difficulties.<\/p>\n
There are a number of reasons why a company might choose to use more debt to finance its assets. One reason is that debt can be a cheaper source of financing than equity. This is because debt holders are willing to accept a lower return on their investment, because they have a legal claim on a company’s assets.<\/p>\n
Another reason why a company might choose to use more debt to finance its assets is that it can increase the return on equity for shareholders. This is because the return on equity is calculated as net income divided by equity. If a company uses more debt to finance its assets, its net income will increase, and its return on equity will also increase.<\/p>\n
However, it is important to note that using more debt also increases the risk of bankruptcy for a company. As a result, companies need to carefully consider the risks and benefits of using debt before making a decision about how to finance their assets.<\/p>\n
Here is a brief explanation of each option:<\/p>\n
[amp_mcq option1=”Higher Equity” option2=”Higher Debt” option3=”Lower Debt” option4=”Variable Cost” correct=”option1″]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[945],"tags":[],"class_list":["post-56184","post","type-post","status-publish","format-standard","hentry","category-financial-management","no-featured-image-padding"],"yoast_head":"\n