Firms That Maintain a Constant Ratio of Debt-Equity Over a Variable

question 77

Multiple Choice

Firms that maintain a constant ratio of debt-equity over a variable business cycle may find that:

• A)Debt has grown too large, too fast
• B)It is more difficult to maintain a stable dividend
• C)Debt covenants always accommodate more debt, but often prevent debt prepayment
• D)Equity is always less expensive to obtain than debt

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Definitions:

Commercial Banks

Financial institutions that offer a wide range of banking services to businesses and consumers, including deposit accounts and loans.

Short-Term Loans

Loans that are scheduled to be repaid in less than a year, used to meet immediate financial needs or cash flow shortages.

Abnormal Returns

Financial returns that exceed what is expected based on risk-adjusted benchmarks or historical averages.

Macroeconomic Analysis

The examination of the overall economic dynamics, including national income, growth rates, inflation, and unemployment.