Discretionary Leverage

B

For discretionary leverage, both actual returns and all-cash returns must be presented.

The correct answer is D. actual returns.

Discretionary leverage refers to a firm's decision to use debt to finance its operations or investments. When a firm employs discretionary leverage, it is using borrowed funds to supplement its equity capital.

When presenting performance, it is important to consider the impact of leverage on the returns generated by the firm. Leverage magnifies the effects of both gains and losses, meaning that returns can be significantly influenced by the use of borrowed funds.

However, the question specifically asks how a firm using discretionary leverage should present its performance. In this case, the firm should report the actual returns, which include the impact of leverage. This means that the returns presented will reflect both the positive and negative effects of the borrowed funds.

Options A, B, and C are incorrect:

Option A: The all-cash basis refers to presenting performance without considering the effects of leverage. This approach would ignore the impact of the borrowed funds, which is inconsistent with the use of discretionary leverage. Therefore, presenting performance on an all-cash basis would not be appropriate in this scenario.

Option B: While it is important to consider the effects of leverage, presenting both actual returns and all-cash basis returns may lead to confusion and make it difficult to evaluate the true performance of the firm. The all-cash basis returns would not accurately represent the firm's performance when discretionary leverage is utilized.

Option C: None of the answers is also incorrect because the firm should present its performance using actual returns, as explained above.

In summary, when a firm uses discretionary leverage, it should present its performance using the actual returns, as this includes the impact of leverage on its performance.