Using financial leverage results in a fixed change that can materially affect the earnings available to the common shareholders.

Question

Quizplus · Accepted Answer

Financial leverage refers to the use of debt financing to increase a company's return on equity (ROE). When a company uses financial leverage, it can generate a higher return on equity by earning a larger return on assets than the cost of the debt used to finance those assets. However, financial leverage also increases the fixed interest expense, which can materially affect the earnings available to the common shareholders. Therefore, the statement is true.

Using Financial Leverage Results in a Fixed Change That Can