Which of the Following Are Practical Difficulties Associated with Capital

question 68

Multiple Choice

Which of the following are practical difficulties associated with capital structure and degree of leverage analyses?

• A) It is nearly impossible to determine exactly how P/E ratios or equity capitalisation rates (rs values) are affected by different degrees of financial leverage.
• B) Managers' attitudes toward risk differ and some managers may set a target capital structure other than the one that would maximise share price.
• C) Managers often have a responsibility to provide continuous service; they must preserve the long-run viability of the enterprise.Thus, the goal of employing leverage to maximise short-run share price and minimise capital cost may conflict with long-run viability.
• D) All of the above.
• E) None of the above represent a serious impediment to the practical application of leverage analysis to capital structure determination.

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Definitions:

Aggregate Demand Curve

A graphical representation that shows the total quantity of goods and services demanded across all levels of prices in an economy.

Loanable Funds Effect

A theory that describes the market interaction between the demand for and supply of loanable funds, influencing interest rates.

Real Balances Effect

The impact of price level changes on the purchasing power of consumers' money holdings, influencing their spending and saving behavior.

Jean Baptiste Say

A French economist known for Say's Law, which suggests that supply creates its own demand in the economy.