As the financial leverage multiplier increases, this may result in ________.
A) an increase in the net profit margin and return on investment, due to the decrease in interest expense as debt decreases
B) an increase in the net profit margin and return on investment, due to the increase in interest expense as debt increases
C) a decrease in the net profit margin and return on investment, due to the increase in interest expense as debt increases
D) a decrease in the net profit margin and return on investment, due to the decrease in interest expense as debt decreases

Question

Quizplus · Accepted Answer

As the financial leverage multiplier increases, it means the proportion of debt in the capital structure increases, resulting in higher interest expenses. This decreases the net profit margin and return on investment. Option A and D are incorrect as they state that a decrease in interest expense leads to an increase in net profit margin and return on investment, which is not correct in this context. Option B is also incorrect as it states that an increase in interest expense leads to an increase in net profit margin and return on investment, which is not accurate in the case of increasing financial leverage.

As the Financial Leverage Multiplier Increases, This May Result in ________