When a securities firm increases its financial leverage, the firm reduces both its potential return on equity (ROE)and its risk.

Question

Quizplus · Accepted Answer

Increasing financial leverage means the firm is using more debt relative to equity. This can increase potential return on equity (ROE) due to the leverage effect, but it also increases financial risk because the firm must meet its debt obligations regardless of its financial performance.

When a Securities Firm Increases Its Financial Leverage, the Firm