A firm is considering the purchase of assets that will increase its fixed operating costs. The firm should decrease the proportion of ____ it employs in its capital structure if it wants to maintain its existing degree of combined leverage.
A) debt
B) warrants
C) common stock
D) common stock and warrants

Question

Quizplus · Accepted Answer

Fixed operating costs are a component of operating leverage, which, when combined with financial leverage (i.e., the use of debt and other fixed-interest funding sources), results in a firm's degree of combined leverage. Therefore, if the firm wants to maintain its existing degree of combined leverage, it must reduce financial leverage by decreasing the proportion of debt in its capital structure.

A Firm Is Considering the Purchase of Assets That Will