The main advantage of financial leverage in good times is that it :
A) provides the firm with more flexible financing.
B) reduces the amount of risk the firm faces.
C) magnifies the return on stockholders' investment.
D) reduces the firm's interest expense.

Question

Quizplus · Accepted Answer

Financial leverage magnifies the return on stockholders' investment in good times because the use of debt allows the company to invest in profitable projects that generate a higher return than the interest rate paid on the debt. This increases the earnings of shareholders and the value of their investment. However, it should be noted that financial leverage also magnifies losses in bad times, which can lead to a decline in the value of the shareholders' investment.

The Main Advantage of Financial Leverage in Good Times Is