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17 February, 07:36

Other things held constant, an increase in financial leverage will increase a firm's market (or

systematic) risk as measured by its beta coefficient.

a. True

b. False

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Answers (1)
  1. 17 February, 08:06
    0
    a. True

    Explanation:

    The formula of the degree of financial leverage is presented below

    = (EBIT) : (EBIT - Interest expense)

    The financial leverage represents the direct relationship between financial leverage and the firm risk or systematic risk

    That means if there is an increase in financial leverage so the systematic risk is also increased while on the other hand, if there is a decrease in financial leverage so the systematic risk is also decreases

    The more debt is available, the more interest is paid, and the more risk comes forward.
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