Answer (A) is correct . Financial leverage is the use of fixed costs in a firm’s capital structure, indicated by high interest payments on debt. These increased fixed costs (and accompanying lowered variable costs) make profitable periods more profitable and unprofitable periods worse.
Answer (B) is incorrect because Operating leverage is affected by the use of fixed costs in the production process, not the capital structure.
Answer (C) is incorrect because The fixed costs associated with the use of debt increase financial leverage.
Answer (D) is incorrect because Operating leverage is affected by the use of fixed costs in the production process, not the capital structure.
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