When a company borrows money at a fixed interest cost each year
A) Neither operating nor financial leverage increase.
B) Operating leverage is not affected, and financial leverage increases.
C) Operating leverage increases, but financial leverage is not affected.
D) Both operating and financial leverage increase.

Question

Quizplus · Accepted Answer

When a company borrows money at a fixed interest cost each year, it increases the financial leverage as the interest payments represent fixed financial obligations that must be paid regardless of the level of operating profits. However, operating leverage is not affected as it deals with the relationship between fixed and variable costs of a company's operations.

When a Company Borrows Money at a Fixed Interest Cost