Answer (A) is correct . The degree of financial leverage (DFL) is the multiple of operating income (or earnings before interest and taxes, called EBIT) over earnings before taxes (EBT). A high multiple indicates heavy use of fixed costs in the firm’s capital structure, revealed by high interest payments on debt.
Answer (B) is incorrect because Zero coupon bonds have no periodic distribution for interest, resulting in a relatively low degree of financial leverage.
Answer (C) is incorrect because A highly leveraged firm would tend to have interest payments coming due routinely, resulting in relatively high current liabilities and consequent low current ratios.
Answer (D) is incorrect because A highly leveraged firm has, by definition, a high level of fixed charges, and so will find it difficult to tie up enough cash to consistently cover these charges.
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