Asked by Jamie PARKER on May 10, 2024
Verified
Leverage _____ the return to shareholders and _____ the risk of their investment.
A) lowers; lowers
B) lowers; increases
C) increases; lowers
D) increases; increases
Leverage
Increasing the rate of return on funds invested by borrowing funds.
Return
The gain or loss on an investment over a specified period, expressed as a percentage of the investment’s cost.
Risk
Uncertainty about loss or injury.
- Understand the concept of leverage and its effects on shareholder returns and investment risk.
Verified Answer
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Final Answer :
D
Explanation :
Leverage increases the return to shareholders by allowing them to invest less capital for a potentially higher return. However, it also increases the risk of their investment because if the investment does not perform well, the losses are magnified.
Learning Objectives
- Understand the concept of leverage and its effects on shareholder returns and investment risk.
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