The main disadvantage of financial leverage is that it:
A)increases the taxes of firms that use it.
B)requires owners to invest even more of their own money.
C)reduces the financial return to stockholders when times are bad.
D)requires firms that use it to make higher dividend payments.

Question

Quizplus · Accepted Answer

Financial leverage involves borrowing money to finance investments in order to increase returns to stockholders. However, it also increases the risk of financial distress and the possibility of not being able to meet debt obligations during bad times. As a result, stockholders may receive lower returns or even lose their entire investment when the company is unable to meet its debt obligations.

The Main Disadvantage of Financial Leverage Is That It