The Main Disadvantage of Financial Leverage Is That

question 47

Multiple Choice

The main disadvantage of financial leverage is that:

• A) it increases the taxes of firms that use it.
• B) it requires owners to invest more of their own money.
• C) it reduces the financial return to stockholders' investment when times are bad.
• D) it protects firms from predatory lending practices by financial institutions.

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Definitions:

Firms Exit

This occurs when businesses cease operations and leave a market, typically due to factors like unprofitability, competitive pressures, or changing market conditions.

Competitive Price-searcher

This refers to a market situation where companies set their prices based on competition and market conditions, aiming to attract customers by offering better deals than their rivals.

Long-run Equilibrium

A state in which supply and demand balance over the long term, and all factors of production and economic variables have fully adjusted.

Demand Curve

A chart depicting how the cost of an item correlates with the amount of that item buyers are prepared to purchase.