Certified Management Accountant Practice Exam 2025 - Free CMA Practice Questions and Study Guide

High financial leverage refers to the use of borrowed funds to finance the acquisition of assets or to fund operations. One of the primary implications of high financial leverage is the increased risk it introduces due to fixed interest obligations. When a company takes on debt, it must make regular interest payments regardless of its financial performance. This creates a fixed cost that can strain cash flow, especially in periods of economic downturn or decreased revenue. If the company's earnings are insufficient to cover these obligations, it risks defaulting on its debt.

Consequently, while financial leverage can enhance returns when a company is performing well, it equally increases vulnerability in challenging times, leading to heightened risk for creditors and investors. The impact emphasizes the importance of careful management of leverage to balance the potential benefits against the associated risks.

The other options, while relevant to different aspects of business operations or financial management, do not capture the fundamental nature of financial leverage and its inherent trade-offs as effectively as the chosen answer.