Which of the following statements is correct?

Question

Quizplus · Accepted Answer

Increasing a firm's use of financial leverage means that the firm is taking on more debt, which leads to higher interest payments. This increases the fixed costs of the firm, making it more vulnerable to changes in revenue, which subsequently increases the volatility of the firm's earnings. Therefore, option C is the only correct statement. Option A is incorrect because it states that financial leverage decreases volatility, which is untrue. Option B is incorrect because the effect of financial leverage is always to increase volatility to some degree. Option D is incorrect because option C is indeed a correct statement.

Which of the Following Statements Is Correct