Irene Panagiotou has recently completed this class. While attending her company's holiday party, she hears one of the executives mention that the company is heavily leveraged. Irene, who recently bought 300 shares in the company's stock, is very interested in this bit of information. What does Irene understand such leverage will do for her?
A) It will increase the amount of taxes she will have to pay on her dividends.
B) It is a time-proven way to both improve the expected return on equity and reduce the financial risk to shareholders. This is because reliance on debt means creditors are assuming most of the risk, while shareholders are entitled to most of the profits.
C) It will protect her return on investment if the company experiences a downturn in sales.
D) It means that the firm is financed with a sizeable amount of debt, which can increase the return on her investment in good times but can lead to a lower return when times are bad.

Question

Quizplus · Accepted Answer

If the company is heavily leveraged, it means it has a significant amount of debt. This can increase the return on investment in good times, but it can also lead to a lower return when times are bad. Irene may benefit from a higher return when the company is doing well, but she may also experience a lower return if the company struggles to repay its debt.

Irene Panagiotou Has Recently Completed This Class