Financial leverage occurs because of the existence of fixed financial costs such as _____.
A) insurance expenses
B) preferred dividends
C) common stock dividends
D) depreciation
E) rent

Question

Quizplus · Accepted Answer

Financial leverage refers to the use of borrowed funds or other fixed-cost financing arrangements to increase the potential return on an investment. Fixed financial costs include obligations such as preferred dividends that must be paid regardless of the company's profitability, as well as debt service payments, lease payments, and other non-variable expenses. With increased leverage, a company's fixed costs become a larger percentage of its total costs, which can amplify the impact of changes in sales or other revenue-generating activities on the firm's profits.

Financial Leverage Occurs Because of the Existence of Fixed Financial