Question

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

1) More debt financing than equity financing.
2) An increased level of borrowing.
3) Operating returns more than sufficient to cover interest payments on borrowed funds.
4) The unsuccessful use of financial level.

Answer 1

A financial leverage index greater than one indicates more debt financing than equity financing and an increased level of borrowing by the firm.

Step-by-step explanation:

A financial leverage index greater than one indicates that a firm has more debt financing than equity financing. This means that the firm has borrowed more money compared to the amount invested by shareholders. It implies that the firm is relying heavily on borrowing to finance its operations and growth.

For example, if a firm has a financial leverage index of 2, it means that the firm has twice as much debt as equity. This can pose financial risks to the firm as it may have higher interest payments and may be more vulnerable to economic downturns.

Therefore, a financial leverage index greater than one suggests that the firm has an increased level of borrowing and may have higher financial risk.