Answer (A) is correct . Financial leverage measures the effect of the use of fixed costs in a firm’s financing structure. The more debt a firm has, the more highly leveraged it is, because the payment of interest on debt is a legal obligation (unlike dividends). Half (10% + 40%) of Sterling’s financing structure is debt, which is more than any of the other three firms.
Answer (B) is incorrect because Debt makes up only 45% of Cooper’s financing structure.
Answer (C) is incorrect because Debt makes up only 45% of Warwick’s financing structure.
Answer (D) is incorrect because Debt makes up only 40% of Pane’s financing structure.
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Which corporation is the most highly leveraged?
