Question

Financial leverage deals with A. the relationship of fixed and variable costs. B. the relationship of debt and equity in the capital structure. C. the entire income statement. D. the entire balance sheet.

Answer 1

Answer: B. the relationship of debt and equity in the capital structure

Explanation: Financial leverage is a ratio to indicate the level of debt that the company maintains, in relation to the amount of money it owns as equity. It is used to measure the proportion to regulate the level of external financing and make decisions accordingly.

Example: A communications company in its financial statements shows a US $ 5,000 liability and an equity of US $ 3,000, so we could say that the level of indebtedness is US $ 5,000 / US $ 3,000 = 1.67 times