A firm that uses large amounts of debt financing in an industry characterized by a high degree of business risk would have ________ earnings per share fluctuations resulting from changes in levels of sales.
A) no
B) constant
C) large
D) small

Question

Quizplus · Accepted Answer

If a firm uses large amounts of debt financing in an industry with high business risk, it means that the firm has a high level of financial leverage. Financial leverage magnifies changes in earnings per share resulting from changes in levels of sales. Therefore, the earnings per share fluctuations will be large.

A Firm That Uses Large Amounts of Debt Financing in an Industry