Financial leverage impacts the performance of a firm by:
A)increasing the volatility of the firm's EBIT.
B)decreasing the volatility of the firm's EBIT.
C)decreasing the volatility of the firm's net income.
D)increasing the volatility of the firm's net income
E)lowering the firm's level of risk.

Question

Quizplus · Accepted Answer

Financial leverage increases the fixed financing costs of a firm (interest payments). This means that when the firm's EBIT increases, the amount of interest paid remains constant, causing net income to increase by a greater percentage. However, when EBIT decreases, the amount of interest paid still remains constant, causing net income to decrease by a greater percentage. This leads to increased volatility in the firm's net income.

Financial Leverage Impacts the Performance of a Firm By