Firms in Stable Industries Are Advised to Keep Debt Levels

question 87

True/False

Firms in stable industries are advised to keep debt levels very low so that shareholders, rather than creditors, receive the benefits of steady cash flows.
Firms in a stable industry are more apt to use financial leverage (greater proportionate debt) to amplify their earnings per common share.

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Definitions:

Fixed Costs

Business expenses that remain constant regardless of the level of production or business activity, such as rent, salaries, and loan payments.

Cross Elasticity

A measure of how the demand for one good responds to a change in the price of another good.

Normal Good

A good for which demand increases as the income of consumers increases, and falls when consumer income decreases.

Quantity Demanded

The total amount of a good or service that consumers are willing and able to purchase at a given price in a specified time period.