Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?
A) In a stable industry.
B) When there is cyclical demand for the firm's products.
C) During an upswing in the business cycle.
D) When there is low interest cost compared to return on assets.

Question

Quizplus · Accepted Answer

When there is cyclical demand for the firm's products, the firm's revenue and profits fluctuate with the economy. If the firm takes on too much financial leverage, such as through high levels of debt, it may not be able to meet its debt obligations during a downturn in the economy. This could lead to default, bankruptcy, and other financial problems for the firm. Therefore, overuse of financial leverage could be detrimental to the firm in this situation. In contrast, financial leverage may be beneficial in a stable industry, during an upswing in the business cycle, or when there is low interest cost compared to return on assets.

Under Which of the Following Conditions Could the Overuse of Financial