Understanding Financial Leverage in Capital Structure

Medium Measures Of Leverage Financial Leverage

XYZ Corporation is analyzing its capital structure and is particularly focused on its financial leverage. In its most recent fiscal year, XYZ reported a net income of $2 million and had total debt of $10 million. The company's equity stands at $5 million. To determine the impact of financial leverage, the management of XYZ Corporation is considering the concept of the debt-to-equity ratio and its implications for risk and return.

Which of the following statements accurately reflects the financial leverage position of XYZ Corporation?

A higher debt-to-equity ratio indicates a lower financial leverage and less risk.

Financial leverage increases the potential return to equity holders, but also increases the risk.

XYZ Corporation's financial leverage is optimal if the debt-to-equity ratio is zero.

Hint

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