By Adding Leverage, the Returns on a Firm Are Split

question 18

Multiple Choice

By adding leverage, the returns on a firm are split between debt holders and equity holders, but equity holder risk increases because ________.

• A) interest payments can be rolled over
• B) dividends are paid first
• C) debt and equity have equal priority
• D) interest payments have first priority

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Definitions:

Public Saving

The difference between the government's tax revenues and its spending, excluding debt interest.

Tax Revenue

The income that is gained by governments through taxation.

Government Spending

Expenditures by the government sector on goods and services, including infrastructure, education, defense, and healthcare, impacting an economy's aggregate demand.

Budget Deficit

A situation where a government's expenditures exceed its revenues within a specific fiscal period, leading to borrowing or debt accumulation.