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:

Percentage of Sales

A financial metric or method that relates various income statement accounts as a percentage of sales, often used for analysis or forecasting.

Operating Leverage

A measure of how much a company's income can be affected by changes in sales volume, highlighting the ratio of fixed costs to variable costs.

Operating Leverage

An indicator of the degree to which net operating income responds to a specific percentage variation in sales revenue.

Sales Mix

A composition of different products or services that a company sells, emphasizing the proportion of each product sold relative to total sales.