Implications of Financial Leverage on Capital Structure

ABC Corporation has recently undergone a significant increase in financial leverage due to the issuance of corporate bonds to fund its expansion. Over the past year, its interest expenses have exceeded its net income. The management is evaluating the implications of this high level of financial leverage on its overall capital structure and risk profile. Financial leverage can impact both the return on equity (ROE) and the cost of equity financing for the firm. Given this situation, consider the following statements regarding financial leverage: