All else the same, the ﬁnancial leverage of a ﬁrm will _________________.
A) Decrease as the debt/equity ratio increases.
B) Decrease as the ﬁrm's retained earnings account grows.
C) Increase by the amount of equity it issues in a given year.
D) Decrease if the ﬁrm has negative net income.
E) Decrease as the ﬁrm uses debt to fund expansion projects.

Question

Quizplus · Accepted Answer

Financial leverage decreases as the firm's retained earnings grow because retained earnings increase equity, reducing the debt/equity ratio.

All Else the Same, the ﬁNancial Leverage of a ﬁRm