Financial leverage question assistance, following, question, decrease

RobertA

Hi
I’ve encountered the question below, and is still confused after reading the answer. Doesn’t finanal leverage mean (total assets)/(avg equity)? In which case, wouldn’t issuing common stock increase equity which would offset the increase in asset purchase? Any assistance is greatly appreciated. Thank you.
Which of the following events would decrease financial leverage?
A)
Paying dividends.
B)
Issuing common stock to purchase assets.
C)
Issuing debt to purchase assets.
Your answer: A was incorrect. The correct answer was B) Issuing common stock to purchase assets.
Acquiring assets by issuing stock decreases the degree of financial leverage since total assets are increased but total liabilities remain the same.

soverby

I think this is where you have to understand the smaller value has the higher impact on the ratio. So both Equity and Asset will increase but Equity is smaller than Asset so equity has a stronger impact on the ratio. Thus Financial Leverage Decreases since Equity increase is stronger than the Asset increase.
Paying dividend is incorrent because paying divident would decrease equity such that Financial Leverage ratio would increase.
C is incorrect because more assets will increase the ratio.