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Basic Question 17 of 19
The effect of financial leverage on the performance of a firm depends on the ______.
B. rate of return on equity
C. current market value of the debt
A. firm's level of EBIT
B. rate of return on equity
C. current market value of the debt
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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Edward Liu
Learning Outcome Statements
explain factors affecting capital structure and the weighted-average cost of capital
CFA® 2024 Level I Curriculum, Volume 2, Module 6.