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

question 115

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.

---

Definitions:

Overhead Resources

Expenses related to the business operations that are not directly tied to a specific product or service, such as utilities, rent, and administrative salaries.

Overhead Rate

The ratio used to allocate indirect costs to products or activities, often based on labor hours, machine hours, or material costs, facilitating overhead application.

Actual Costs

The genuine costs incurred for materials, labor, and overhead in the production process or in providing a service.

Fixed Manufacturing Overhead

Costs that remain constant in total regardless of the level of production, such as salaries and rent for factory buildings.