An increase in a firm's financial leverage will:

Question

Quizplus · Accepted Answer

An increase in financial leverage means that the firm is relying more on debt financing, which increases interest expenses and financial risk. This can result in higher variability in earnings per share, as interest expenses can fluctuate with changes in interest rates and can affect the firm's ability to generate profits. B is incorrect because higher financial leverage increases financial risk, which is a component of overall business risk. C is incorrect because the relationship between financial leverage and firm value is ambiguous and depends on factors such as the cost of debt and whether taxes are considered. D is incorrect because an increase in financial leverage does not directly affect the WACC, which is determined by the cost of equity, cost of debt, and target weights for each.

An Increase in a Firm's Financial Leverage Will