Amalgamated Mining,Inc

question 117

Multiple Choice

Amalgamated Mining,Inc.has very high operating leverage due to the capital intensive nature of the steel business.The firm's CEO is concerned about the variability in the firm's EPS if sales should drop,and decides to take action.Which of the following will reduce the variability in the firm's EPS for a given change in sales?

• A) The CEO may increase the firm's financial leverage and hence reduce the variability by using non-shareholder money to support the business.
• B) The CEO may decrease the firm's financial leverage, thus lowering the firm's total leverage.
• C) The CEO may increase the firm's total leverage by raising money from the sale of common stock.
• D) The CEO may issue more corporate bonds and use the proceeds to pay off short-term liabilities.

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Definitions:

Managers

Individuals responsible for making decisions and overseeing the operations of a part or the entirety of an organization.

Company's Assets

Resources owned by a company that have economic value and can be used to meet debts, commitments, or generate revenue.

Company's Debt

The total amount of money owed by a company to creditors, including loans, bonds, and other forms of financial liabilities.

End-Of-Period Cash Balance

The amount of cash on hand at the conclusion of a financial reporting period.