Which of the following is TRUE of leverage?
A)It refers to the effects that operating and financial fixed costs have on the returns that shareholders earn.
B)It is associated with risks which are out of the control of managers.
C)It includes the effect of operating fixed costs on the returns of shareholders and not the financial fixed costs.
D)It is used to evaluate the profitability associated with various levels of sales.

Question

Quizplus · Accepted Answer

Leverage refers to the effects that operating and financial fixed costs have on the returns that shareholders earn. It is a measure of how much debt and equity is used to finance a business's assets and operations. The higher the leverage, the higher is the risk and potential reward for shareholders. Therefore, leverage is closely related to the profitability of a business.

Which of the Following Is TRUE of Leverage