An increase in the financial leverage of a firm as a result of an increase in outstanding debt __________ the potential reward to stockholders while ___________ the risk of financial distress or bankruptcy.
A) Decreases; decreasing
B) Increases; decreasing
C) Increases; increasing
D) Decreases; increasing
E) Does not affect; increasing

Question

Quizplus · Accepted Answer

Increasing financial leverage by raising more debt increases the potential reward to stockholders because it can amplify the returns on their investment. However, it also increases the risk of financial distress or bankruptcy due to the higher interest obligations and repayment requirements associated with the increased debt.

An Increase in the Financial Leverage of a Firm as a Result