Which of the following is one of the reasons for attempting to increase a business's financial leverage?
A) It can have a positive impact on the business's return on equity.
B) The business has to be grown with one's own money.
C) The interest on debt has a non-deductible nature.
D) It may lead to an inability to pay the interest on the debt.
E) It increases a business's overall risk.

Question

Quizplus · Accepted Answer

Increasing a business's financial leverage, or the use of debt to fund operations and investments, can result in a higher return on equity for shareholders. This is because debt carries a lower cost of capital than equity, and the interest paid on debt is tax-deductible, which can result in a higher net income for the business. However, it is important to note that increasing financial leverage also increases the risk of the business, as too much debt can result in an inability to pay interest or even bankruptcy.

Which of the Following Is One of the Reasons for Attempting