BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Detailed explanation-1: -Fundamental analysis uses degree of financial leverage (DFL) to determine the sensitivity of a company’s earnings per share (EPS) when there is a change in its earnings before interest and taxes (EBIT). When a company has a high DFL, it generally has high interest payments, which negatively impact EPS.
Detailed explanation-2: -Leverage is an investment strategy of using borrowed money-specifically, the use of various financial instruments or borrowed capital-to increase the potential return of an investment.
Detailed explanation-3: -The study shows that when leverage increases, investors demand a higher return to compensate them for the added financial risk. The results make economic sense because shareholders are expected to demand higher returns to compensate them for the additional financial risk.
Detailed explanation-4: -When the return on investment is higher than the cost of debt.