Everything Else Equal, If a Firm Shifts Its Capital Structure

question 160

Multiple Choice

Everything else equal, if a firm shifts its capital structure to include more debt than before the shift, then the firm's business risk should

• A)increase because the degree of financial leverage increases
• B)decrease because the degree of operating leverage decreases .
• C)Not change because capital structure decisions should affect the firm's financial risk, not its business risk.
• D)not change because, although additional common stock will increase financial risk , the business risk should decrease by the same amount.
• E)increase because the degree of financial leverage increases.

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Definitions:

Direct Method

An approach to calculating cash flows from operating activities that involves listing all major operating cash receipts and payments.

Cafeteria Department

A division within an organization that manages the provision of food services to employees.

Number of Employees

The total count of individuals employed by a business at any given time.

Reciprocal Services Method

An accounting method used to allocate costs among different departments within an organization that provide services to each other.