Leverage increases the return on the stockholder's investments when times are good, but it also reduces the financial return to stockholders when times are bad.

Question

Quizplus · Accepted Answer

When times are good, leverage can magnify the returns on the investment, as borrowed funds can be used to invest in assets that yield higher returns than the cost of borrowing. However, when times are bad, leverage can work against the stockholder, as the interest expense on the borrowed funds becomes more difficult to meet and may decrease the overall financial return to the stockholder.

Leverage Increases the Return on the Stockholder's Investments When Times