Which of the following statements regarding leverage is false?
A) The ultimate effect of leverage depends on the ﬁrm's EBIT.
B) If things go poorly for the ﬁrm, increased leverage provides greater returns to shareholders (as measured by ROE and EPS).
C) As a ﬁrm leversup, shareholders are exposed to greater risk.
D) The beneﬁts of leverage will not be as great in a ﬁrm with substantial accumulated losses or other types of tax shields compared to a ﬁrm without many tax shields.
E) Beyond a certain point, the costs of ﬁnancial distress outweigh the beneﬁts of leverage.

Question

Quizplus · Accepted Answer

Increased leverage does not necessarily provide greater returns to shareholders if things go poorly for the firm. In fact, it can make the company more vulnerable to financial distress and result in lower returns for shareholders.

Which of the Following Statements Regarding Leverage Is False