A firm currently has a financial leverage ratio of
2. After a thorough review, the firm's management has concluded that they have to write-down assets worth 200,000. This will cause the firm's financial leverage to ________.
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A. B. C. D.C
The write-down of assets effectively decreases assets and equity by the same amount, once tax effects are correctly figured. Since A > E, a decrease in both quantities by the same amount increases the financial leverage (A/E) ratio.