Question

Which of the following effects will decrease the amount of financial leverage in the firm? In...

Which of the following effects will decrease the amount of financial leverage in the firm? In each case, assume that all other activity in the firm does not change.

A shift of $100 from cash to inventory.

A decrease in the firm's retained earnings account.

A new equity issue.

The use of inventory to increase cash.

A 2 for 1 stock split.
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Homework Answers

Answer #1

Financial leverage means the amount of Debt in the books of a firm,

Debt/Equity Ratio is the most commonly used ratio to measure amount of financial leverage,

D/E Ratio = Debt/Equity

If firm issues new equity then D/E ratio will decrease so financial leverage will decrease.

So,

Option C is correct.

Movement from cash to inventory or inventory to cash does not change financial leverage,

A decrease in retained earning will increase D/E Ratio so financial leverage will increase.

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