The increased use of financial leverage may
1) affect the firm's credit rating
2) decrease risk
3) alter the firm's earnings
A)1 and 2
B)1 and 3
C)2 and 3
D)1, 2, and 3

Question

The increased use of financial leverage may​
1) affect the firm's credit rating
2) decrease risk
3) alter the firm's earnings
A)​1 and 2
B)1 and 3​
C)​2 and 3
D)​1, 2, and 3

Quizplus · Accepted Answer

Increased use of financial leverage is likely to affect a firm's credit rating negatively since excessive debt may be viewed as risky by lenders. Moreover, financial leverage increases the risk of insolvency, which may lead to a decrease in earnings. Thus, the increased use of financial leverage can affect the firm's earnings negatively. However, it can also decrease risk if the firm earns more on borrowed funds than it pays in interest.

The Increased Use of Financial Leverage May​

The Increased Use of Financial Leverage May