Financial leverage has the following effect on financial performance:
A)during periods of reasonably good performance, leverage enhances results in terms of ROE and EPS.
B)leverage adds variability to financial performance making the firm's stock a riskier investment.
C)leverage always makes performance better and thereby increases stock price.
D)Both a and b

Question

Quizplus · Accepted Answer

Financial leverage can enhance financial performance during periods of good performance, as it allows the company to use debt to amplify returns. However, this same leverage can also add variability and risk to financial performance, making the company's stock a riskier investment. Therefore, both options A and B are correct. Option C is incorrect, as leverage does not always make performance better and increase stock price.

Financial Leverage Has the Following Effect on Financial Performance