By Adding Leverage, the Returns on the Firm Are Split

question 48

Multiple Choice

By adding leverage, the returns on the firm are split between debt holders and equity holders, but equity holder risk increases because

• A) interest payments can be rolled over.
• B) dividends are paid first.
• C) interest payments have first priority.
• D) debt and equity have equal priority.

---

Definitions:

Machine Hours

A measure of the amount of time a machine is operated, used in allocating manufacturing costs to units of product.

Finished Goods

Items that are finished being made but have not been purchased by consumers yet.

Cost of Goods Sold

The total cost of manufacturing or purchasing the goods that a company sold during a specific period.

Direct Labor Hours

The total hours of labor directly involved in producing goods or providing services, used in calculating labor costs and efficiency.