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Indicate the relationship between financial leverage and financial risk?
Wiki User
∙ 13y ago
As the financial leverage increases, the breakeven point of the company increases. The company now has to sell more of its product (or service) in order to break even.
As the financial leverage increases, the risk to banks and other lenders increases because of the higher probability of bankruptcy.
As the financial leverage increases, the risk to stockholders increases because greater losses may be incurred if the company goes bankrupt.
As the financial leverage increases, the risk to stockholders increases because the higher leverage will cause greater volatility in earnings and greater volatility in the stock price.
Wiki User
∙ 13y ago
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