We Use the Term Leverage to Describe the Use of Debt

question 40

Multiple Choice

We use the term leverage to describe the use of debt in the firm's capital structure because:

• A) it magnifies the potential expected return to equity and the variability of that expected return.
• B) it magnifies the risk of bankruptcy.
• C) it magnifies earnings per share.
• D) none of the options.

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Definitions:

Indorse

To sign the back of a financial instrument, thus transferring ownership or to endorse it.

Obligation

An obligation, either ethical or legal, to carry out or avoid a particular action.

Order Of

Pertains to the sequence or arrangement of things following a particular pattern or rule.

HDC Status

Status as a Holder in Due Course, which refers to a holder of a negotiable instrument who took it for value, in good faith, and without notice of any defect or claim.