A Firm That Makes Extensive Use of Long-Term Liabilities to Meet

question 24

Multiple Choice

A firm that makes extensive use of long-term liabilities to meet its financing needs is

• A)using financial leverage
• B)likely to default on these liabilities
• C)could be more profitable for its owners than one that doesn't use long-term liabilities
• D)both a and c are correct

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Definitions:

Sales Increase

A rise in the amount of products or services sold by a business within a specific period, indicating growth or an uptick in market demand.

Degree of Operating Leverage

A financial ratio that measures how sensitive a company's operating income is to changes in revenue, indicating risk level.

Variable Expenses

Costs that vary in total in direct proportion to changes in an activity level or volume, such as materials and labor costs.

Fixed Expenses

Expenses that remain constant regardless of the amount of goods produced or sold, including items like rent, salaries, and insurance costs.