Financial leverage exposes shareholders to financial risk because:
A)competition forces companies to adopt an optimal capital structure.
B)a company uses debt to increase the expected rate of return to shareholders.
C)interest on debt needs to be paid even when operating performance declines.
D)none of the given options.

Question

Quizplus · Accepted Answer

Financial leverage is the use of debt to finance a company's operations and investments. While debt can increase the expected rate of return to shareholders, it also exposes them to financial risk because interest on debt needs to be paid even when operating performance declines. This can result in a decrease in earnings and dividends, potentially lowering the value of the shareholders' investment.

Financial Leverage Exposes Shareholders to Financial Risk Because