If a firm increases its financial risk by selling a large bond issue that increases its...

If a firm increases its financial risk by selling a large bond issue that increases its financial leverage explain this assumption?

Expert Solution

Financial leverage is given through the following formula

DFL = EBIT / EBT

It essentially measures the firms earnings to pay off its interest cost. If the firm sells a large bond issue the risk is higher since interest payments are fixed and cannot be deferred. The firm must make sufficient money to pay the interest and if it does not make enough also it must service the debt. Hence, the financial risk increases through a large bond issue as the interest cost is also on the higher side.

jeff jeffy answered 2 years ago

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If a firm increases its financial risk by selling a large bond issue that increases its...

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