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

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 2 years ago

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Using debt and preferred stock in the capital structure of a firm will _____. decrease business...

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