If a ﬁrm is using ﬁnancial leverage successfully what would be the impact of doubling operating earnings?
A) The return on equity will increase, but not double
B) The return on equity will 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 successfully uses financial leverage, doubling operating earnings would more than double the return on equity. This is because financial leverage amplifies the effects of changes in operating earnings on the return on equity, assuming the cost of debt remains constant and is less than the return on investment.

If a ﬁRm Is Using ﬁNancial Leverage Successfully What Would