Question

Financial leverage in a firm is positively affected by:

• A. Intensity of tangible assets
• B. Operating leverage
• C. Profitability
• D. Tax Rate

Answer 1

Answer: (A)

Intensity of tangible assets

Financial leverage means acquiring assets with the funds provided by creditors and preferred stockholders for the benefit of common stockholders. Financial leverage is a two-edged sword. It may be positive or negative. Tangible assets, many of which can be easily used as collateral, support debt.

Accordingly, the amount of tangible assets is well-established as a principal driver of leverage. As investing is shifting more and more from tangible to intangible assets, it becomes crucial to understand to what extent intangible assets support debt.