CFA Practice Question

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CFA Practice Question

The effect of financial leverage on the performance of a firm depends on the ______.

A. firm's level of EBIT
B. rate of return on equity
C. current market value of the debt
Correct Answer: A

User Contributed Comments 3

User Comment
katybo DFL= ebit/(ebit-i)
viruss well according to me, by extension, it depends also on the market value of debt. E.g. a floating rate note >> when interests increase, the market value decrease. as a decrease in market value most likely means an increase in interests rates (let's assume no credit risk), then interests payments increase ! Then, it depends on EBIT and on interests rate level (by extension, impacting market value)
fanDango viruss, I'm fairly sure that we are not considering any variable rate debt. These are all fixed levels of debt, so the coupon payments will remain fixed.
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