The greater the amount of financial leverage used by a firm, the greater its ____, all other things being equal.
A) profitability
B) liquidity
C) risk
D) size

Question

Quizplus · Accepted Answer

Financial leverage involves using borrowed capital to increase the potential return on investment. However, it also increases the risk of loss. This is because a firm with a high amount of financial leverage must make regular interest payments on its debts, which can be difficult if profits are low or if there is a downturn in the economy. Therefore, the greater the financial leverage used by a firm, the greater its risk.

The Greater the Amount of Financial Leverage Used by a Firm