Capital Structure Factors
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Questions and Answers

What is the primary reason why equity shareholders may prefer debt financing over issuing additional equity shares?

  • To reduce the firm's financial risk
  • To avoid diluting their control over the firm (correct)
  • To increase the firm's business risk
  • To increase the firm's earnings per share

    • Which of the following is a result of using debt financing, according to the concept of financial risk?

  • Increase in the firm's return on equity
  • Additional risk placed on the ordinary equity shareholders (correct)
  • Decrease in the firm's earnings per share
  • Reduced business risk of the firm

    • When is debt financing preferable to equity financing from the earnings per share (EPS) point of view?

  • When the earnings before income tax (EBIT) is low
  • When the earnings before income tax (EBIT) is high (correct)
  • When the return on equity (ROE) is high
  • When the return on assets (ROA) is less than the cost of debt

    • What is the result of financial leverage when the return on assets (ROA) is less than the cost of debt?

    <p>Depresses return on equity (ROE)</p> Signup and view all the answers

    Which of the following factors is considered in capital structure decisions due to its impact on the firm's earnings per share and return on equity?

    <p>Income</p> Signup and view all the answers

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