CFA Practice Question

There are 120 practice questions for this study session.

CFA Practice Question

Increased financial leverage leads to ______.

I. increased financial risk
II. increased business risk
III. decreased financial risk
A. I only
B. I and II
C. II and III
Explanation: Increased financial leverage increases the risk to equity holders.

User Contributed Comments 4

User Comment
linjinfeng Increse financial leverage will lead to increasing financial risk, not business risk
wink26 Not sure if it's in the CFA bible, but if you have greater financial leverage, you're much more sensitive to business risk. I suppose technically, the level of business risk doesn't increase, but in a practical matter, the effect of business risk would be greater.
jmcarr02 Business risk is the combined risk of sales and operation risks, it has nothing to do with financial risk.
jnptrsn1 Wouldnt a company with a high business risk want a lower debt/equity ratio so that it can ensure that it can handle its business expenses on time? Wouldnt a high level of debt be a hindrance to a company with a high business risk?
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