Which Statement Is Correct About Financial Leverage

question 35

Multiple Choice

Which statement is correct about financial leverage?

• A)It reduces the risk of bankruptcy to the company.
• B)It reduces the level of risk exposure of the shareholders.
• C)It quantifies the relationship between the relative level of a firm's debt and its equity base.
• D)It has nothing to do with the relationship between the relative level of a firm's debt and its equity base.

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Definitions:

Equity

The remaining interest in a company's assets after all debts are subtracted, signifying the owner's stake in the business.

Dividends

Funds disbursed by a company to its stockholders, originating from the firm's profits.

Stockholders

Individuals or institutions that own shares in a corporation, making them owners of the company.

Equity

The value of an owner's interest in a property, calculated by subtracting liabilities from the value of the asset.