Shweser Qbank: Corp Finance question currently, financing, question, provided, correct

CFA4Techie

Financial leverage would NOT be increased if a firm financed its next project with:

A) common stock.

B) preferred stock.

C) bonds with embedded call options.

That is all information provided with the question.
Unless the firm is currently UN-leveraged, I don't think any of the above answer make sense?

Or does anyone have a better explanation than:


The correct answer was A) common stock.

Financial leverage is the result of financing assets with fixed income securities such as bonds or preferred stock. Each of these alternatives has a required payment component that increases the risk of the firm beyond that arising solely from business risk.

DSquaredSlim

I dont see what the issue is, the answer is clearly correct

if the firm takes on preferred stock or debt it is commiting to make a payment, it is becoming levered, things go good, great ROE is multiplied, things go bad...the @#$%& will multiply...

on the other hand if it takes on more stock, it would become less levered....
say it had 1$ debt, 1$ stock, well if it took on 1 more in stock, the effect of debt becomes less...

chandsingh

Sorry, didn't know what come in to me.

I saw it asking
Financial leverage would NOT be !!changed!! if a firm financed its next project with:

Haha, but it was increase......

Thx for clear that up.