Which one of the following statements is NOT correct?
A) A leveraged firm is riskier than a firm that has no leverage.
B) A leveraged firm is less risky than a firm that has no leverage.
C) A firm that uses debt magnifies the return to its shareholders.
D) A firm that does not use debt incurs opportunity cost of increasing value of shares.

Question

Quizplus · Accepted Answer

The correct statement is that a leveraged firm is riskier than a firm that has no leverage. This is because leverage increases the firm's fixed costs, which increase the risk of bankruptcy if the firm is unable to generate sufficient earnings to cover those costs. Option B is incorrect because it states the opposite.

Which One of the Following Statements Is NOT Correct