Sally Snooks has recently completed this class.While attending her company's holiday party,she hears one of the executives mention that the company is heavily leveraged.Sally,who recently bought 300 shares in the company's stock,is very interested in this bit of information.What does Sally understand such leverage will do for her?
A)It will increase the amount of taxes she will have to pay on her dividends.
B)It is a time-proven way to both improve the expected return on equity and reduce the financial risk to shareholders. This is because reliance on debt means creditors are assuming most of the risk, while shareholders are entitled to most of the profits.
C)It will protect her return on investment if the company experiences a downturn in sales.
D)It means that the firm is financed with a sizeable amount of debt, which can increase the return on her investment in good times but can lead to a lower return when times are bad.

Question

Quizplus · Accepted Answer

When a company is heavily leveraged, it means that it has a significant amount of debt. This can lead to a higher return on investment when times are good, but it can also lead to a lower return when times are bad. In the event of a downturn, the company may struggle to make payments on its debt, which could cause the value of the stock to decline. Sally understands that leverage could increase her return on investment, but also comes with higher risk. Therefore, the best choice is D.

Sally Snooks Has Recently Completed This Class