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:

Liquidity Ratio

A financial metric used to determine a company's ability to pay off its short-term liabilities with its most liquid assets.

Inventory Turnover

This is a ratio showing how many times a company's inventory is sold and replaced over a period, usually a year, indicating the efficiency of inventory management.

Current Ratio

A liquidity ratio that measures a company's ability to cover its short-term obligations with its current assets.

Quick Ratio

A measure of a company's ability to meet its short-term obligations with its most liquid assets, excluding inventory.