A leverage effect will occur if: a. fixed operating costs are greater than zero or if interest expense is less than zero b. fixed operating costs are greater than zero or if interest expense is greater than zero c. fixed operating costs are less than zero or if interest expense is greater than zero d. fixed operating costs are less than zero or if interest expense is less than zero

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Business

Haleigh Booker

18 December, 21:01

A leverage effect will occur if: a. fixed operating costs are greater than zero or if interest expense is less than zero b. fixed operating costs are greater than zero or if interest expense is greater than zero c. fixed operating costs are less than zero or if interest expense is greater than zero d. fixed operating costs are less than zero or if interest expense is less than zero

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Leo Patton · Answer 1

B. fixed operating costs are greater than zero or if interest expense is greater than zero

Explanation: The "leverage effect" refers to the well-established relationship between stock returns and both implied and realized volatility: volatility increases when the stock price falls.

The leverage effect explains a company's Return on Equity in terms of its Return on Capital employed and Cost of debt. The leverage effect is the difference between Return on Equity and Return on Capital employed.