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Other Factors Affecting Capital Structure

Unfavourable ...

Question

Unfavourable financial leverage

A

Indicates a low level of profitability

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B

Indicates a high level of profitability

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C

Makes borrowings more costly

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D

Both (a) and (c)

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Solution

The correct option is D Both (a) and (c)
Financial leverage is the amount of debt that an entity uses to buy more assets.
Leverage is employed to avoid using too much equity to fund operations.
An excessive amount of financial leverage increases the risk of failure, since it becomes more difficult to repay debt.
Unfavorable leverage occurs when the firm does not earn as the funds cost.
This indicate low level of profitability and also it makes borrowings more costly.

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