what does financial leverage tell about the health of a company
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It is typically measured using ratios such as the debt-to-equity ratio or the debt ratio. Show more…
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What is financial leverage?
Excessive levels of debt can definitely be a red flag. While the company may have legitimate reasons for selecting debt financing over equity financing, too much debt can paralyze the company as they may fall into violation of their debt covenants and have difficulty meeting their financial obligations. Class, how might the interest coverage ratio be telling in this type of situation?
Madhur L.
With respect to financial leverage which of the following is not a valid statement? Financial leverage makes good years look better by increasing the shareholder return. Return on assets will generally equal return on common equity except when the company has no long-term debt. Financial leverage is beneficial when the company earns more than the incremental after-tax cost of debt. Financial leverage makes bad years look worse by decreasing the shareholder return.
Adi S.
Recommended Textbooks
Horngren’s Cost Accounting
Cost Accounting A Managerial Emphasis
Principles of Accounting Volume 1: Financial Accounting
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