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:

Break-even Sales

The amount of revenue required to cover total costs, both fixed and variable, with no profit or loss.

Fixed Expenses

Fixed costs, encompassing rent, salaries, and insurance, that are unaffected by changes in production or sales activity.

Operating Period

The length of time during which a business or a project is expected to operate or carry out its primary operations.

Break-even Sales

The amount of revenue needed to cover all fixed and variable costs, resulting in zero net profit or loss.