Question

57. Which firm is more likely to use high financial leverage? And why? Can you please...

57. Which firm is more likely to use high financial leverage? And why? Can you please explain the answer?

a. Firm with volatile sales and automated production line

b. Firm with stable sales and manual production

c. Firm with volatile sales and manual production

d. Firm with stable sales and automated production

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Answer #1

Answer : D) Firm with stable sales and automated production

Financial Leverage refers to use of borrowed fund to purchase new assets which are expected to bring income or capital gains to the company in future. If the production is automated, it means that the company uses machinery for production. Such company requires to purchase assets. The purchase can be financed with debt if the company has stable sales. If the sales are stable, the company can use debt easily since the repayment will not be a problem.

So, a company with stable sales and automated production uses more financial leverage.

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