The higher the degree of financial leverage employed by a firm,the:
A)higher the probability that the firm will encounter financial distress.
B)lower the amount of debt incurred.
C)less debt a firm has per dollar of total assets.
D)higher the number of outstanding shares of stock.
E)lower the balance in accounts payable.

Question

Quizplus · Accepted Answer

The higher the degree of financial leverage, the more debt the firm has relative to equity. This means that the firm is relying more on borrowed funds to finance its operations, which increases the risk of financial distress if the firm cannot generate enough profits to cover its debt obligations. Therefore, A is the correct choice as it reflects the increased probability of financial distress with higher financial leverage.

The Higher the Degree of Financial Leverage Employed by a Firm,the