Home › CA Inter › Financial Management › Financial Leverage › Financial Leverage is described as a "double-edg…
Financial Leverage is described as a "double-edged sword" because:
AIt cuts both costs and revenue
BIt removes both fixed and variable costs
CIt can be used twice
DIt magnifies both gains and losses to equity holders
Answer & Solution
Correct answer: D. It magnifies both gains and losses to equity holders
1. When ROI > Kd, leverage boosts EPS (favourable).
2. When ROI < Kd, leverage reduces EPS (unfavourable).
3. Hence "double-edged sword".
_Source: ICAI BoS CA Inter Paper 6A, Ch 6 "Financing Decisions — Leverages", §4_
Related questions
For DFL calculation when preference dividend exists, the denominator uses:A firm has DFL = 2 and EBIT falls by 10%. EPS will change by:Financial Leverage is also called:If a company has no debt, what is the Financial Leverage?A change in EPS due to a unit change in EBIT is captured by:EBIT ₹6 lakh; Interest ₹2 lakh. Degree of Financial Leverage is:Financial Leverage measures the relationship between: