Asked by Chris Fragy on Jul 16, 2024
Verified
When a firm borrows money,which types of leverage is it using?
A) financial leverage
B) operating leverage
C) shareholder leverage
D) combined operating leverage
Financial Leverage
The use of borrowed funds to increase the potential return on an investment.
Shareholder Leverage
The use of borrowed funds by shareholders to increase their potential returns from an investment.
Operating Leverage
A measure of how revenue growth translates into growth in operating income due to fixed costs in a company's business model.
- Recognize the different types of leverage and their implications for a firm's financial risk.
Verified Answer
BB
Barrianne BrownJul 22, 2024
Final Answer :
A
Explanation :
Financial leverage refers to the use of borrowed funds or debt to finance a firm's operations. When a firm borrows money, it increases its financial leverage, which can potentially increase its profitability and return on investment. This is because the borrowed funds can be used to make investments or carry out projects that have the potential to generate greater returns than the cost of the borrowed funds. However, there is also a risk associated with higher financial leverage, as the company must use a portion of its profits to pay interest on the borrowed funds, which can reduce overall profitability if not managed properly.
Learning Objectives
- Recognize the different types of leverage and their implications for a firm's financial risk.
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