Which of the following statements regarding leverage is false?
A) The ultimate effect of leverage depends on the firm's EBIT.
B) If things go poorly for the firm, increased leverage provides greater returns to shareholders (as measured by ROE and EPS).
C) As a firm levers up, shareholders are exposed to greater risk.
D) The benefits of leverage will not be as great in a firm with substantial accumulated losses or other types of tax shields compared to a firm without many tax shields.
E) Beyond a certain point, the costs of financial distress outweigh the benefits of leverage.

Question

Quizplus · Accepted Answer

Increased leverage means that a firm is using more debt relative to equity. If things go poorly for the firm, increased leverage actually increases the risk of loss to shareholders, not greater returns. Leverage amplifies outcomes, both positive and negative, but in the case of poor performance, it increases the risk of losses, not returns.

Which of the Following Statements Regarding Leverage Is False