Financial leverage involves substituting debt for equity in the firm's capital structure. Similarly, operating leverage involves substituting fixed for variable costs in its cost structure.

Question

Quizplus · Accepted Answer

This statement is correct. Financial leverage refers to the use of debt financing to increase the potential return on equity investment, while operating leverage refers to the use of fixed expenses, such as rent or salaries, to increase the potential profitability of the business.

Financial Leverage Involves Substituting Debt for Equity in the Firm's