Which of the following is true about the leveraging effect? Under economic growth conditions, firms with relatively low leverage will have higher expected returns. Under economic growth conditions, firms with relatively more leverage will have higher expected returns.

Question

Business

Herring

5 August, 15:09

Which of the following is true about the leveraging effect? Under economic growth conditions, firms with relatively low leverage will have higher expected returns. Under economic growth conditions, firms with relatively more leverage will have higher expected returns.

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Answers (1)

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Bright · Answer 1

Under economic growth conditions, firms with relatively more leverage will have higher expected returns.

Explanation:

"Leverage" refers to the borrowing of money in order to have capital for business operations. This is a common strategy being used by companies or businesses in order to attain greater returns.

When the economy is growing, this is an indicator that using the leverage will bring about more returns to the company. Thus, the more leverage a company has, the higher the expected returns because the economy is favorable.

So, this explains the answer.