Increasing the financial leverage of a company will _______ shareholders' expected returns and ______ their risk.

Question

Quizplus · Accepted Answer

Increasing financial leverage means a company is using more debt to finance its operations. This can lead to higher expected returns for shareholders because debt financing can be less expensive than equity financing, potentially leading to higher profits. However, it also increases risk because the company must meet its debt obligations regardless of its financial performance, which can be more burdensome during downturns or periods of low profitability.

Increasing the Financial Leverage of a Company Will _______ Shareholders