Langley has a debt ratio of 0.3 and its competitor,Appleton,has a debt ratio equal to 0.7.Determine the statement below that is correct.
A)Appleton finances a smaller percentage of its assets with liabilities as compared to Langley.
B)Appleton's financial leverage is less than Langley's financial leverage.
C)Appleton's financial leverage is greater than Langley's financial leverage.
D)Langley has a higher risk from its financial leverage.
E)Higher financial leverage involves lower risk.

Question

Quizplus · Accepted Answer

Appleton's financial leverage is greater than Langley's because a higher debt ratio (0.7 for Appleton vs. 0.3 for Langley) indicates that Appleton uses more debt relative to its equity to finance its assets, which increases financial leverage.

Langley Has a Debt Ratio of 0