Which of the following statements is true for financial leverage?
A) The asset turnover ratio measures financial leverage.
B) Financial leverage always increases profitability.
C) Financial leverage is measured in the proportion of total assets relative to total equity.
D) The higher the debt to equity ratio, the higher the financial leverage.

Question

Quizplus · Accepted Answer

Financial leverage is measured by the amount of debt relative to equity, also known as the debt to equity ratio. The higher the debt to equity ratio, the higher the financial leverage. However, it is important to note that while financial leverage has the potential to increase profitability, it also increases the risk and volatility of a company's earnings. The asset turnover ratio measures how efficiently a company is using its assets to generate sales, but it is not directly related to financial leverage.

Which of the Following Statements Is True for Financial Leverage