Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?
A) stable industry
B) cyclical demand for the firm's products
C) upswing of business cycle
D) low interest cost compared to return on assets

Question

Quizplus · Accepted Answer

The overuse of financial leverage can be detrimental to the firm in a cyclical demand for the firm's products because if demand decreases, the firm may not have enough revenue to cover its debt obligations, leading to default. In a stable industry or upswing of the business cycle, the firm may have enough revenue to cover its debt obligations. Low interest cost compared to return on assets is actually desirable for the firm, as it allows them to use financial leverage to increase their return on equity.

Under Which of the Following Conditions Could the Overuse of Financial