The Increase in Risk to Shareholders When Financial Leverage Is

question 25

Multiple Choice

The increase in risk to shareholders when financial leverage is introduced is best evidenced by:

• A)higher EPS as EBIT increases.
• B)a higher variability of EPS with debt than with all-equity financing.
• C)increased use of homemade leverage.
• D)the increase in taxes.
• E)decreasing earnings as EBIT increases.

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Definitions:

Buy Shares

The act of purchasing ownership interests in a company, thereby becoming a shareholder entitled to dividends and capital gains.

Lower Bound

The minimum value that a theoretical price, such as an option's price, can reach.

Call Option

A contractual agreement that allows the buyer the choice, without any requirement, to purchase an asset at an agreed-upon price within a set period.

Stock Price

The current trading price of a company's shares on the stock market, reflecting the market's valuation of the company at a particular time.