Holding all other factors constant, if a firm increases its current liabilities relative to total assets,
A) it increases return and reduces risk.
B) it increases return and increases risk.
C) it reduces return and reduces risk.
D) it reduces return and increases risk.

Question

Quizplus · Accepted Answer

Increasing current liabilities relative to total assets typically means the firm is using more debt financing. This can increase the return on equity (due to the leverage effect) but also increases financial risk.

Holding All Other Factors Constant, If a Firm Increases Its