All else the same, the financial leverage of a firm will _________________.
A) Decrease as the debt/equity ratio increases.
B) Decrease as the firm's retained earnings account grows.
C) Increase by the amount of equity it issues in a given year.
D) Decrease if the firm has negative net income.
E) Decrease as the firm uses debt to fund expansion projects.

Question

Quizplus · Accepted Answer

Financial leverage decreases as the firm's retained earnings grow because retained earnings increase equity, reducing the debt-to-equity ratio.

All Else the Same, the Financial Leverage of a Firm