A management that wanted to increase the financial leverage of its firm would:
A) raise additional capital by selling common stock.
B) use excess cash to purchase preferred stock for the treasury.
C) raise additional capital by selling fixed interest rate long-term bonds.
D)try to increase its ROI by increasing asset turnover.

Question

Quizplus · Accepted Answer

The most effective way to increase financial leverage is by increasing the amount of debt in the capital structure. The sale of long-term fixed interest rate bonds would add a significant amount of debt to the firm's balance sheet, thereby increasing its financial leverage. Option A is incorrect because selling common stock would increase equity and decrease financial leverage. Option B is incorrect because purchasing preferred stock would not affect the level of financial leverage. Option D is incorrect because increasing ROI through asset turnover would not necessarily increase financial leverage.

A Management That Wanted to Increase the Financial Leverage of Its