The use of fixed cost sources of funds, such as debt and preferred stock, affect a firm's ____.
A) financial risk
B) degree of operating leverage
C) market power
D) business risk

Question

Quizplus · Accepted Answer

The use of fixed cost sources of funds, such as debt and preferred stock, adds financial risk to a firm's capital structure. This is because these sources require a fixed payment, regardless of the firm's earnings or cash flow. In contrast, equity financing does not have a fixed payment and is considered more flexible. As a result, a higher proportion of debt and preferred stock in a firm's capital structure increases the financial risk of the firm.

The Use of Fixed Cost Sources of Funds, Such as Debt