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:

Environmental Uncertainty

A condition where there is a lack of information about the environmental factors that can affect an organization's operations.

State Uncertainty

The condition in which there is lack of certainty or predictability concerning the future or the current state of something, often affecting decision-making processes.

Subjective Uncertainty

The perception of doubt or inability to predict outcomes due to lacking information or inherent unpredictability in situations.

Objective Uncertainty

The state of having insufficient knowledge due to an inherently unpredictable environment or situation.