If a firm has a high degree of leverage then a small change in sales results in
A) an unpredictable change in expected profits
B) a very small change in expected profits
C) no change in expected profits
D) a large change in expected profits.

Question

Quizplus · Accepted Answer

When a firm has high leverage, it means that it has a significant amount of debt in its capital structure. This increases the fixed costs of the firm, such as interest expenses. As a result, even a small change in sales can have a significant impact on the firm's profits. If the firm's sales increase, the profits will increase by a large amount due to the leverage effect. On the other hand, if the sales decrease, the profits will decrease by a large amount, leading to a high degree of variability in expected profits. Therefore, choice D is the correct answer.

If a Firm Has a High Degree of Leverage Then