Financial leverage:

1. increases as the net working capital increases.

2. is equal to the market value of a firm divided by the firm's book value.

3. is inversely related to the level of debt.

4. is the ratio of a firm's revenues to its fixed expenses

5. increases the potential return to the shareholders

Question

Business

Azaria Hayes

27 September, 01:24

Financial leverage:

1. increases as the net working capital increases.

2. is equal to the market value of a firm divided by the firm's book value.

3. is inversely related to the level of debt.

4. is the ratio of a firm's revenues to its fixed expenses

5. increases the potential return to the shareholders

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Answers (1)

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Ulises · Answer 1

Correct option is (5)

Explanation:

Financial leverage refers to including debt in the acquiring financial assets of the company. Source of funds includes a mix of equity and debt. The more the debt content, more is the company financially leveraged.

As proportion of debt increases, cost of equity increases as investors assume more risk. Volatility of stock increases so investors need to be compensated more for risk assumed by them. As such, their return increases.