Question
In: Finance
Using debt and preferred stock in the capital structure of a firm will _____. decrease business...
Using debt and preferred stock in the capital structure of a firm will _____.
decrease business risk
increase the book value of common stock
increase the tax payable by the firm.
increase financial risk
decrease operating leverage
Solutions
Expert Solution
Using debt will INCREASE FINANCIAL RISK.
This is because the shareholders are at a financial risk of not getting paid at liquidation since the debts will be paid out first.
It does not affect business risk since business risk arises in the normal course of business. Debt has no impact on book value of stock. That is the amount at which equity is issued. Issuing debt reduces the tax payable since inteerst is tax deductible. The degree of operating leverage is a measure which indicates the effect on EBIT with changes in Sales.
jeff jeffy answered 1 year agoRelated Solutions
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Indicate the detailed steps on how to use a FINANCIAL
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%
Preferred stock
10
Common equity
25
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