The greater the usage of financial leverage, the larger is the variability of
A) revenues
B) gross profits
C) operating earnings
D) net earnings

Question

The greater the usage of financial leverage, the larger is the variability of​
A) ​revenues
B) gross profits​
C) operating earnings​
D) net earnings​

Quizplus · Accepted Answer

The larger the usage of financial leverage, the larger is the variability of net earnings. This is because financial leverage involves borrowing money to invest in the company, which increases the potential return on investment but also increases the risk of losses. As interest payments on the borrowed money need to be paid regardless of the company's performance, a decrease in earnings can result in a larger decrease in net earnings due to the added interest expense. Therefore, net earnings will be more variable as financial leverage increases.

The Greater the Usage of Financial Leverage, the Larger Is