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2 July, 17:53

Company A uses long-term debt to finance its assets, and company B uses capital generated from shareholders to finance its assets. Which company would be considered a financially leveraged firm? A) Company A

B) Comapny B

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  1. 2 July, 18:02
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    A) Company A

    Explanation:

    Financial leverage refers to the financial risk present in a firm because of the presence of fixed cost sources of finance. Debt is a fixed cost finance source as interest is always payable on debt by the company. The larger the debt, the more is the financial risk (leverage) and vice-versa. Mathematically, financial leverage is -

    Earning Before Interest and Tax (EBIT) / Profit Before Tax

    OR

    % change in EPS (Earnings Per Share) / % change in EBIT (Earning before Interest and Tax)

    Hence, Company A would be considered a financially leveraged firm because it uses long term debt to finance its assets as compared to company B, which uses capital generated from shareholders to finance its assets.
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Home » Business » Company A uses long-term debt to finance its assets, and company B uses capital generated from shareholders to finance its assets. Which company would be considered a financially leveraged firm? A) Company A B) Comapny B
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