Financial leverage
A)increases the return to the common shareholders during good earnings years.
B)uses lower cost borrowed funds to earn a higher rate of return on those funds than their cost.
C)decreases the return to the common shareholders during bad earnings years.
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

Financial leverage allows a company to use borrowed funds to invest in projects that earn a higher rate of return than the cost of borrowed funds, which increases the return to common shareholders during good earnings years. However, if the company does not earn enough to cover the cost of borrowed funds, then financial leverage can decrease the return to common shareholders during bad earnings years. Therefore, all of the above choices are correct.

Financial Leverage