Which of the following is true of leverage?
A) It refers to the effects that operating and financial fixed costs have on the returns that shareholders earn.
B) It is associated with risks which are out of the control of managers.
C) It includes the effect of operating fixed costs on the returns of shareholders and not the financial fixed costs.
D) It is used to evaluate the profitability associated with various levels of sales.

Question

Quizplus · Accepted Answer

Leverage refers to the use of fixed costs to magnify the returns earned by shareholders. It includes both operating fixed costs (such as rent and salaries) and financial fixed costs (such as interest payments). By using leverage, companies can increase their potential profits, but also increase the risks associated with those profits. As such, it is important for managers to carefully consider the level of leverage they use in their operations.

Which of the Following Is True of Leverage