Answer:
A) Company A
Explanation:
Financial leverage refers to the financial risk present in a firm because of the presence of fixed cost sources of finance. Debt is a fixed cost finance source as interest is always payable on debt by the company. The larger the debt, the more is the financial risk (leverage) and vice-versa. Mathematically, financial leverage is -
Earning Before Interest and Tax (EBIT) / Profit Before Tax
OR
% change in EPS (Earnings Per Share) / % change in EBIT (Earning before Interest and Tax)
Hence, Company A would be considered a financially leveraged firm because it uses long term debt to finance its assets as compared to company B, which uses capital generated from shareholders to finance its assets.
