Other Things Held Constant, Which of the Following Events Is

question 63

Multiple Choice

Other things held constant, which of the following events is most likely to encourage a firm to increase the amount of debt in its capital structure?

• A) Its sales become less stable over time.
• B) The costs that would be incurred in the event of bankruptcy increase.
• C) Management believes that the firm's stock has become overvalued.
• D) Its degree of operating leverage increases.
• E) The corporate tax rate increases.

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Definitions:

Compounded Nominal Annual Rate

The rate of interest for one year, without taking inflation into account, which is compounded at specified intervals within that year.

Effective Rate

The actual interest rate on an investment or loan, taking into account the compounding of interest over time.

Effective Rate

The actual rate of interest earned or paid on an investment or loan over a specified timeframe, taking into account the effect of compounding.

Finance Company

A business that provides loans to individuals or corporations, apart from traditional banks, often focusing on areas such as auto financing, personal loans, and leasing.