Question

The use of debt is called A. financial leverage. B. production leverage. C. operating leverage. D. total asset turnover risk. E. business risk. Reset Selection

Answer 1

Answer:

A- Financial leverage

Explanation:

The use of debt is called FINANCIAL LEVERAGE because it involve the use of debt or borrowed money rather than equity when an asset is purchased with the hope that the profit gain after deducting tax from the equity holder transaction will be higher than the borrowing cost.

Financial leverage is based on the used of borrowed money or debt to acquire an additional assets which will cause the returns on the owner's cash investment to be amplified.

The return on equity is increased through leverage leading to the excess amount of the financial leverage to increases the risk of failure, since it will becomes more difficult to repay back the debt or borrowed money.

Financial leverage is measured as the ratio of total debt to total assets meaning the greater the amount of debt , the greater the financial leverage.

Answer 2

Answer:

A. financial leverage.

Explanation:

Financial leverage refers to the use of debt in order to buy more assets. This is measured by comparing the ratio of total debt to total assets. This means that, as the proportion of debt to assets increases, so does the amount of financial leverage. As a very large amount of debt can be hard to pay, an excessive amount of financial leverage can greatly increase the risk of failure.