An Increase in a Firm's Level of Debt Will

question 64

Multiple Choice

An increase in a firm's level of debt will:

• A) reduce the business risk of the firm.
• B) increase the variability in earnings per share.
• C) lower the expected return on shareholders' funds.
• D) increase the return to the debt holders.

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Definitions:

Tax Expense

The total amount of taxes a company incurs, reflecting both current taxes due and future tax liabilities.

Pre-Tax Book Income

The income of a business before taxes have been deducted, as reported in its financial statements.

Tax Depreciation

The allowance for a decrease in the value of business assets for tax purposes, calculated under specific regulations and used to reduce taxable income.

Book Depreciation

The depreciation of an asset recorded in the financial statements of a business, calculated using the chosen depreciation method.