If a company issues common stock, what happens to financial leverage? I think it will decrease because it the stock issuing will increase equity.
You're on the right track! When a company issues common stock, it increases its equity by raising capital from investors. This, in turn, affects the financial leverage of the company.
Financial leverage refers to the degree of a company's reliance on debt to finance its operations. It is usually measured by the debt-to-equity ratio, which reflects the proportion of debt and equity in the company's capital structure.
When a company issues common stock, it increases its equity component, effectively reducing the proportion of debt in the capital structure. This decrease in debt relative to equity results in a lower debt-to-equity ratio, indicating reduced financial leverage.
So, in summary, you are correct! Issuing common stock increases equity and lowers financial leverage as it reduces the proportion of debt in the company's capital structure.