Financial leverage is associated with :
(A) Unstable return
(B) Proportion of debt
(C) High investment
(D) Proportion of equity
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (B), and (D) only
(A) Unstable return — Not associated with financial leverage (Incorrect). Leverage describes how the capital is made up, not the return it earns. More debt does raise the financial risk, but leverage itself is a measure of the mix of funds.
(B) Proportion of debt — Associated with financial leverage (Correct). Financial leverage is the proportion of debt in the total capital of a firm.
(C) High investment — Not associated with financial leverage (Incorrect). Leverage depends on the mix of debt and equity, not on the size of the investment. A small firm can be heavily in debt while a large one has no debt at all.
(D) Proportion of equity — Associated with financial leverage (Correct). Leverage is measured as debt against equity, or debt against debt plus equity. So equity is the other half of the measure: the more equity, the lower the leverage.
NCERT (2026-27 Edition):
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