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:

Income Statement

A document detailing a corporation's financial results for a given fiscal period, including income, costs, and net profit.

Balance Sheet

A financial statement that shows a company's assets, liabilities, and shareholders' equity at a specific point in time, providing a basis for computing rates of return and evaluating capital structure.

Financing Activities

Transactions between a business and its sources of funding, including equity and debt, reflected in the cash flow statement.

Net Income

The total profit of a company after all expenses and taxes have been deducted from total revenue.