The use of increasing amounts of combined leverage ____ the risk of financial distress.
A) decreases
B) increases
C) has no effect on
D) creates diversity in

Question

Quizplus · Accepted Answer

The use of combined leverage involves a combination of both operating and financial leverage. Operating leverage involves fixed operating costs, while financial leverage involves fixed financing costs. As the amount of combined leverage increases, the risk of financial distress also increases. This is because a company with high levels of combined leverage will have fixed costs that it must pay regardless of the level of sales or revenue. If sales or revenue fall below a certain level, the company may not be able to generate enough cash flow to cover these fixed costs, which could lead to financial distress.

The Use of Increasing Amounts of Combined Leverage ____ the Risk