An increase in financial leverage will result in________in the return on equity.
A) an increase
B) no change
C) a decrease
D) an undetermined change

Question

An increase in financial leverage will result in________in the return on equity. 
A) an increase
B) no change
C) a decrease
D) an undetermined change

Quizplus · Accepted Answer

Financial leverage refers to the use of borrowed funds to invest in assets with the expectation of generating higher returns. By increasing financial leverage, a company is increasing its use of borrowed funds, which magnifies potential gains but also increases the risk of losses. This increased risk can result in greater volatility in the company's earnings and stock price, which can either increase or decrease the value of the shares. Therefore, an increase in financial leverage will result in an increase in the risk and potential returns of the investment.

An Increase in Financial Leverage Will Result In________in the Return