All Else Equal, If a Firm Increases Its Leverage (Either

question 23

Multiple Choice

All else equal, if a firm increases its leverage (either operating, financial, or both) , its weighted average cost of capital probably will

• A)increase because risk increases.
• B)decrease because risk decreases.
• C)increase because risk decreases.
• D)remain about the same because risk does not change.
• E)change somehow, but more information is needed to determine the direction.

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Definitions:

Operating Expenses

Costs incurred during the normal course of business operations, excluding the cost of goods sold.

Income from Operations

Earnings generated from a company's regular, core business activities before interest and taxes.

Gross Profit Percentage

A financial metric expressing the gross profit as a percentage of net sales, showing the efficiency of a company in making and selling its products.

Gross Profit

The difference between sales revenue and cost of goods sold, indicating the profitability of a company's core operations before overhead expenses.