If a business increases its use of fixed-interest debt while operating income remains unchanged, which measure is most directly affected?
Correct answer: A. Financial leverage
- A. Financial leverage
- B. Inventory turnover
- C. Gross profit margin
- D. Receivables collection period
Explanation
Fixed-interest debt creates compulsory finance costs and therefore increases financial leverage. The other measures relate mainly to operations, pricing or working capital management.
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Business finance explains how organisations plan, obtain and use money while balancing risk, return and liquidity. Topics include financial statements, time value of money, budgeting, working capital, capital structure, sources of finance, investment appraisal and cost of capital. Capital budgeting evaluates long-term projects, whereas working capital manages day-to-day operations.
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