soverby

A is the correct answer.
(3.97 - 3.7) / 3.97 = .068 = 6.8%
Denominator is 3.97 and not 3.7. The question says, ‘compared to when it is securitized’ is the key. When it is securitized, leverage is higher at 3.97, so that should be the denominator.
Although, their calculation in the solution is not correct. it should have been (3.97 - 3.7) / 3.97 instead of (1 - 3.7) / 3.97 .
Edit: 7.4% is how much the Financial Leverage increased by, over 3.7. But the question is asking how much the Financial Leverage Decreased by from 3.97, and that is 6.8%. We will need to be careful on these gimmicks in the exam. It scares me.