Question

The financial leverage ratio for a company was 2.33 in 2019 while its competitor's ratio was 1.75 for the same year. The higher ratio for the first company indicates

it uses less debt than equity financing to acquire its assets.

the competitor finances more of its assets using equity rather than debt.

the first company has a lower level of financial risk than its competitor.

both companies are utilizing debt financing effectively.

none of the above

Answer 1

The leverage radio means total company debt/ shareholders equty.

The company can raise amount from the equty or through debtors.

1.the higher ratio for the first company indicates it uses high debt than equty finance to aqure assets.

2. The competetor finances more of its assets using debts rather than equty.

3. The first company has higher level of financial risk than its competitors

4.both companies are utilizing more debt and less capital. It is an ineffective way