More established company's that are generating cash flow, have the opportunity for more flexibility in the...

More established company's that are generating cash flow, have the opportunity for more flexibility in the firm's capital structure. Specifically how much debt financing and how much equity financing the company requires and can service. Which of the following statements is (are) true?

A. Financial risk is added to operating risk to arrive at the total risk exposure of the common shareholders.

B. Financing with debt and preferred stock creates more financing risk due to their fixed periodic payments.

C. Debt financing is considered LESS expensive than equity financing because of the tax deductibility of interest payments, and lower fees and other expenses (floatation costs).

D. Answers A. and B.

E. All are true statements (A,B, and C)

Expert Solution

E. All are true statements (A,B, and C)

Explanation:-

1. Total risk is equal to operating and financing risk

2. More fixed liability increase risk

3. Debt is cheaper due to fixed payment and tax deductibility

jeff jeffy answered 2 years ago

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