The higher the debt ratio, the more financial leverage a firm has and, thus, the greater will be its risk and return.

Question

Quizplus · Accepted Answer

A higher debt ratio means that the firm has borrowed more funds to finance its operations, which increases its financial leverage. However, this also increases the risk associated with the firm's operations, as it now has to pay interest on the borrowed funds and may face default risk if it is unable to repay the debt. On the other hand, a higher debt ratio can also lead to higher returns if the firm is able to generate a return on its investments that is greater than the cost of borrowing funds. Therefore, the statement is true.

The Higher the Debt Ratio, the More Financial Leverage a Firm