Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?
A) Stable industry
B) Cyclical demand for the firm's products.
C) Upswing of business cycle.
D) Low interest cost compared to return on assets

Question

Quizplus · Accepted Answer

The overuse of financial leverage can be detrimental to a firm during a cyclical demand for their products because during a downturn or recession, the firm may struggle to generate enough revenue to cover the interest payments on their debt, leading to bankruptcy or default. In a stable industry or an upswing of the business cycle, there may be less risk of this happening. Low interest cost compared to return on assets indicates that financial leverage may be beneficial for the firm.

Under Which of the Following Conditions Could the Overuse of Financial