________ is the potential use of fixed financial charges to magnify the effects of changes in earnings before interest and taxes on the firm's earnings per share.
A) Financial leverage
B) Operating leverage
C) Total leverage
D) Debt service

Question

Quizplus · Accepted Answer

Financial leverage refers to the use of fixed financial charges, such as interest and preferred stock dividends, to magnify the effects of changes in earnings before interest and taxes (EBIT) on the firm's earnings per share (EPS). When a firm has high financial leverage, a small change in EBIT can lead to a larger change in EPS, which can be favorable or unfavorable depending on the circumstances. Therefore, the use of financial leverage can increase the potential return to shareholders but also increases the risk of financial distress or bankruptcy.

________ Is the Potential Use of Fixed Financial Charges to Magnify