If a firm is using financial leverage successfully what would be the impact of doubling operating earnings?
A) The return on equity will double.
B) The return on equity will increase, but not double.
C) The return on equity will more than double.
D) The return on equity will decline by half.

Question

Quizplus · Accepted Answer

When a firm uses financial leverage successfully, it means that they have a high proportion of debt in their capital structure. This allows them to generate a higher return on equity (ROE) if they are able to earn a higher return on their assets than the cost of debt. Doubling operating earnings would mean that the firm is earning a higher return on their assets, which would translate into a higher net income. As a result, the ROE would increase, but not in a linear way. Instead, it would more than double due to the effect of financial leverage. Therefore, the best answer is C.

If a Firm Is Using Financial Leverage Successfully What Would