Which of the following statements is CORRECT?
A)In general, a firm with low operating leverage also has a small proportion of its total costs in the form of fixed costs.
B)There is no reason to think that changes in the personal tax rate would affect firms' capital structure decisions.
C)A firm with high business risk is more likely to increase its use of financial leverage than a firm with low business risk, assuming all else equal.
D)If a firm's after-tax cost of equity exceeds its after-tax cost of debt, it can always reduce its WACC by increasing its use of debt.
E)Suppose a firm has less than its optimal amount of debt.Increasing its use of debt to the point where it is at its optimal capital structure will decrease the costs of both debt and equity financing.

Question

Quizplus · Accepted Answer

Operating leverage refers to the proportion of fixed costs in a firm's cost structure. A firm with low operating leverage has a small proportion of its total costs in the form of fixed costs. This means that as the firm's sales change, its costs will not change by a significant amount, and so it will be less affected by changes in sales volume. This is opposed to a firm with high operating leverage, which has a significant proportion of its costs in the form of fixed costs, meaning that it will be more affected by changes in sales volume. Therefore, statement A is correct.

Which of the Following Statements Is CORRECT