Everything Else Equal, If a Firm Shifts Its Capital Structure

question 160

Multiple Choice

Everything else equal, if a firm shifts its capital structure to include more debt than before the shift, then the firm's business risk should

• A)increase because the degree of financial leverage increases
• B)decrease because the degree of operating leverage decreases .
• C)Not change because capital structure decisions should affect the firm's financial risk, not its business risk.
• D)not change because, although additional common stock will increase financial risk , the business risk should decrease by the same amount.
• E)increase because the degree of financial leverage increases.

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Definitions:

Cash Disbursements

Outflows of cash for expenses, payments to creditors, or investments, usually tracked in a cash disbursements journal in accounting.

Payments

Payments refer to the transfer of money from one party to another, often as compensation for goods or services.

Petty Cash Fund

A small amount of cash kept on hand within a business for minor and immediate expenses.

Internal Control

Initiatives and standards implemented by a firm to assure the correctness of financial and accountancy details, encourage integrity, and obstruct fraudulent activities.