Which of the following is true of the degree of financial leverage of a firm? a.

Question

Which of the following is true of the degree of financial leverage of a firm?

a. The degree of financial leverage affects the earnings before interest and taxes of the firm.

b. The degree of financial leverage is defined as the percentage change in net operating income with a given percentage change in sales.

c. The degree of financial leverage affects the operating section of the income statement.

d. A higher degree of financial leverage suggests that higher risk is associated with the firm's mix of debt and equity financing.

Explanation / Answer

The correct answer is option D.

Higher Degree of Financial Leverage is an indicator of high Fixed Debt to the Equity. Thus, There will be high risk is associated with the Firm's mix of Debt and Equity.

The more Debt will lead to the more fixed payments thus the Finance cost will be higher and it will reduce the EBIT.

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