Which of the following would increase a firm's financial leverage?
A) An increase in depreciation
B) An increase in interest expense
C) An increase in the number of shares of common stock outstanding
D) a and b

Question

Quizplus · Accepted Answer

Financial leverage refers to the use of debt to finance a firm's operations. An increase in interest expense, which represents an increase in debt, would increase a firm's financial leverage. An increase in depreciation (choice A) would not directly impact a firm's financial leverage. An increase in the number of shares of common stock outstanding (choice C) would not impact the firm's financial leverage because it represents equity, not debt. The correct answer is therefore B, an increase in interest expense.

Which of the Following Would Increase a Firm's Financial Leverage