Everything Else Equal, If a Firm Shifts Its Capital Structure

question 91

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 ordinary shares will increase financial risk, the business risk should decrease by the same amount.

---

Definitions:

IFRS 3

Refers to the International Financial Reporting Standard that covers the accounting treatment for all business combinations, including the recognition and measurement of goodwill and determination of fair value for identifiable assets and liabilities.

Business Combinations

The uniting of separate companies, assets, or entities into one through various types of financial transactions, including mergers and acquisitions.

Journal Entry

A record in accounting that notes a specific financial transaction in a company's books, involving debits and credits to various accounts.

Elimination Entry

An accounting entry made to remove the effects of intra-company transactions when consolidating the financial statements of a parent and its subsidiaries.