Question

Financial leverage: Group of answer choices is the ratio of a firm's revenues to its fixed expenses. is equal to the market value of a firm divided by the firm's book value. increases the potential return to the stockholders. is inversely related to the level of debt. increases as the net working capital increases.

Answer 1

Answer: Increases the potential return to the stockholders.

Explanation:

Financial Leverage is the use of more debt to fund company assets. This can lead to higher potential returns to the Stockholders if the interest rate attached to the debt is less than the Company's required rate of return. That way, the difference between the rates will bring about a positive return for shareholders.

Also, having more debt provides a sort of tax shield to the earnings of the Stockholders because Debt is Tax Deductible. This will therefore increase the earnings going to the Stockholders.