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QUESTION: The financial leverage multiplier is the ratio of the firm's total assets to stockholders' equity....

QUESTION:
The financial leverage multiplier is the ratio of the firm's total assets to stockholders' equity.

ANSWER OPTIONS:
True
False

Please specifically state IN THE SUBJECT LINE if the answer is TRUE or FALSE. Further, discussions should not simply be a restatement of other comments made by students who have previously posted. It is also important to know that if students include the question in their answer response, they should be aware that said text will NOT be included in the total word count. Finally, brief and limited responses such as the following WILL NOT be considered for extra credit:??

EXAMPLES OF INADEQUATE RESPONSES:  
“I think the answer is False.” OR “The correct answer is “C.”

Postings must be no less than 200 words in length to be considered. Any posting less than 200 words in length will not be accepted.

Solutions

Expert Solution

Answer is "False"

Financial leverage is the Ratio by which a company uses fixed-income securities ( debt and preferred equity). A high degree of financial leverage means high interest payments this affect negatively the company's bottom-line earnings per share.

To know more about financial leverage we should study about financial risk,

Financial risk is the risk to the stockholders that is caused by an increase in debt and preferred equities in a company's capital structure. As a company increases debt and preferred equities, interest payments increase, reducing EPS. As a result, risk to stockholder return is increased. making financing decisions to ensure any increases in debt and preferred equity increase the value of the company.

Degree of Financial Leverage:- The formula for calculating a company's degree of financial leverage measures the percentage change in earnings per share over the percentage change in EBIT. DFL is the measure of the sensitivity of EPS to changes in EBIT as a result of changes in debt.

Formula: DFL =percentage change in EPSorEBIT/percentage change in EBITEBIT-interest

jeff jeffy answered 2 years ago
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