Which Statement Is Correct About Financial Leverage

question 48

Multiple Choice

Which statement is correct about financial leverage?

• A)Leverage can increase an investor's returns but also increases the risk of loss.
• B)Leverage can decrease an investor's returns and also decrease the risk of loss.
• C)Leverage decreases the payments that a company makes on an ongoing basis.
• D)Leverage decreases the debt level relative to a company's equity base.

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Definitions:

Principal

The amount of money originally invested or loaned, on which basis interest and returns are calculated.

Agent

A party who has the authority to act on behalf of and bind another party.

Third-Party Beneficiary

A person who is not directly involved in a contract but is entitled to benefits from its performance by the contracting parties.

Gratuitous Agent

An agent who acts without being paid for his or her services.