What is the main advantage of financial leverage?
A)reduces the firm's interest expense
B)increases the expected return to shareholders
C)reduces the amount of risk the firm faces
D)provides the firm with more flexible financing

Question

Quizplus · Accepted Answer

The main advantage of financial leverage is that it can increase the expected return to shareholders. This is because when a firm uses debt to finance its operations, it can increase its earnings per share (EPS) by paying less in interest expenses than it earns in profit. This can lead to a higher return on equity (ROE) for shareholders. However, it is important to note that financial leverage also increases the risk of the firm, so it should be used judiciously. Choices A, C, and D are incorrect as they do not reflect the main advantage of financial leverage.

What Is the Main Advantage of Financial Leverage