I. The higher the financial leverage, the higher financial risk and the higher the cost of capital. II. Higher debt ratio, the higher the DFL and Required rate of return. The greater the degree of Financial Leverage, the greater the fluctuations in EPS. A• TF B• FF C• FT D• TT

I. The higher the financial leverage, the higher financial risk and the higher the cost of capital. II. Higher debt ratio, the higher the DFL and Required rate of return. The greater the degree of Financial Leverage, the greater the fluctuations in EPS. A• TF B• FF C• FT D• TT

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter16: Capital Structure Decisions

Section: Chapter Questions

Problem 1Q

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Question

I. The higher the financial leverage, the higher financial risk and the higher the cost of capital.

II. Higher debt ratio, the higher the DFL and Required rate of return. The greater the degree of Financial Leverage, the greater the fluctuations in EPS.

A• TF

B• FF

C• FT

D• TT

Definition Definition Percentage gain or loss from a specific investment over time. The rate of return is the difference between the closing and initial values of an investment divided by the initial value of the investment. The closing value includes any intermediate cash flows such as dividends or interest amounts.

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