The Main Advantage of Financial Leverage Is That

question 67

Multiple Choice

The main advantage of financial leverage is that:

• A) it forgoes the need for companies to pay their creditors.
• B) it protects companies from going bankrupt.
• C) it magnifies the financial return on the investment of stockholders when times are good.
• D) it protects companies from predatory lending practices by financial institutions.

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Definitions:

Forward Contract

A legally binding agreement between two parties calling for the sale of an asset or product in the future at a price agreed upon today.

Strike Price

The set price at which the holder of a financial instrument can buy or sell the underlying asset in options trading.

Call Option

A financial contract giving the buyer the right, but not the obligation, to buy an asset at a specified price within a particular time period.

Out-Of-The-Money

A term used to describe an option contract that would not result in a profit if exercised at the current market level.