Which statement is correct about financial leverage?
A)Leverage can increase an investor's returns but also increases the risk of loss.
B)Leverage can decrease an investor's returns and also decrease the risk of loss.
C)Leverage decreases the payments that a company makes on an ongoing basis.
D)Leverage decreases the debt level relative to a company's equity base.

Question

Quizplus · Accepted Answer

Financial leverage involves borrowing money to increase the potential returns on an investment. However, it also increases the risk of loss because the borrowed money must be repaid regardless of investment performance. Option B is not correct because using leverage does not necessarily decrease the risk of loss. Option C and D are not correct because financial leverage typically increases the ongoing payments a company must make and can also increase the debt level relative to the equity base.

Which Statement Is Correct About Financial Leverage