Question

Which of the following is true about the leveraging effect? Interest on debt can be deducted from pre-tax income, resulting in a greater taxable income and a smaller available operating income. Interest on debt is a tax-deductible expense, which means that it can reduce a firm’s taxable income and tax obligation

Answer 1

Interest on debt is a tax-deductible expense, which means that it can reduce a firm’s taxable income and tax obligation

Answer: Option 2.

Explanation:

The leveraging effect is explained in terms of the returns of the company in terms of the equity. It measures the returns that a company or an organisation will get because of the capital that it has employed in various places and the returns that it will get for the company.

It also measures the returns of the company in terms of the cost of the debt of the company. The leverage effect is the difference between Return on Equity and Return on Capital employed.