Question

What does a financial leverage index greater than one indicate about a firm?

(a) The unsuccessful use of financial leverage.
(b) Operating returns more than sufficient to cover interest payments on borrowed funds.
(c) More debt financing than equity financing.
(d) An increased level of borrowing.

Answer 1

A financial leverage index greater than one indicates more debt financing than equity financing.

Step-by-step explanation:

A financial leverage index greater than one indicates that a firm has more debt financing than equity financing. It means that the firm has borrowed more money compared to the amount of equity it has. This increased level of borrowing can potentially lead to higher financial risks for the firm.

Having a financial leverage index greater than one does not necessarily indicate unsuccessful use of financial leverage or operating returns more than sufficient to cover interest payments on borrowed funds.