Increasing financial leverage decreases the volatility of owners' returns.

Question

Quizplus · Accepted Answer

Increasing financial leverage actually increases the volatility of owners' returns. This is because leverage magnifies gains and losses, so when a company's profits increase, the return to equity holders is amplified by the leverage. However, when a company's profits decrease, the losses are amplified, which can result in larger losses to equity holders.

Increasing Financial Leverage Decreases the Volatility of Owners' Returns