Asked by NAINA MISHRA on May 20, 2024
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Financial leverage has the following effect on financial performance:
A) during periods of reasonably good performance, leverage enhances results in terms of ROE and EPS.
B) leverage adds variability to financial performance making the firm's stock a riskier investment.
C) leverage always makes performance better and thereby increases stock price.
D) Both a and b
Financial Performance
An assessment of how well a company can use assets from its primary mode of business and generate revenues.
ROE
Return on Equity; a financial ratio indicating the profitability of a company in relation to its equity capital.
EPS
Earnings Per Share; a metric that indicates the portion of a company's profit allocated to each outstanding share of common stock.
- Comprehend the principle of financial leverage and its effect on stock price and the value of a firm.
- Analyze the effect of financial leverage on crucial performance measures such as ROE, EPS, and EBIT.
- Acknowledge the connection between the performance of a company and the dynamics of financial and operating leverage.
Verified Answer
Learning Objectives
- Comprehend the principle of financial leverage and its effect on stock price and the value of a firm.
- Analyze the effect of financial leverage on crucial performance measures such as ROE, EPS, and EBIT.
- Acknowledge the connection between the performance of a company and the dynamics of financial and operating leverage.
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