When only equity counts as capital, the higher the capital ratio, the
A)lower the leverage measure.
B)lower the degree of financial leverage.
C)higher the leverage measure.
D)lower the leverage measure AND lower the degree of financial leverage.
E)lower the degree of financial leverage AND higher the leverage measure.

Question

Quizplus · Accepted Answer

When only equity counts as capital, a higher capital ratio indicates a company is financing more of its assets with equity rather than debt. This results in both a lower leverage measure (since leverage is a ratio of debt to equity) and a lower degree of financial leverage (since financial leverage is the use of debt to amplify returns, which decreases as equity financing increases).

When Only Equity Counts as Capital, the Higher the Capital