If a company issues new share capital to redeem debentures, then ____________.

OL will increase

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FL will increase

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OL will decrease

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FL will decrease

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Solution

The correct option is C FL will decrease
Financial leverage is the degree to which a company uses fixed-income securities such as debt and preferred equity. The effect of financial leverage emerges if a company uses debt financing. Low financing leverage indicates a low proportion of debt in a company's capital structure, which means both lower financial risk and lower sensitivity of EPS to fluctuate in EBIT. Company issues new share capital to redeem debenture that means the debt of company decreased whereas equity portion of company increased hence, financial leverage will decrease.

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Assuming that Proprietary Ratio is 0.6 : 1, state giving reasons, whether the ratio will increase, decrease or will not change in each one of the following cases:

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(ii) Issue of equity shares against purchase of machinery.

(iii) Issue of debentures against purchase of machiney.

(iv) Redemption of debentures for cash.

(v) Conversion of debentures into preference shares.

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