Financial Leverage Involves Substituting Debt for Equity in the Firm's

question 87

Multiple Choice

Financial leverage involves substituting debt for equity in the firm's capital structure, operating leverage involves:

• A)substituting variable costs for fixed costs in the firm's cost structure.
• B)substituting fixed costs for variable costs in the firm's cost structure.
• C)increasing financial risk.
• D)None of the above

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Definitions:

David Ricardo

An influential British economist known for developing the comparative advantage theory, which explains how nations can gain from trade by specializing in producing goods for which they have a lower opportunity cost relative to other countries.

Tenant Farmers

Individuals who rent land to farm from a landlord.

Economic Rent

Extra income earned by a factor of production (like land or labor) due to its relatively fixed supply, exceeding what is economically necessary to bring it into use.

Landowners

Individuals or entities that hold legal title or ownership of land.