Financial leverage exposes shareholders to financial risk because

Select one:

a. competition forces companies to adopt an optimal capital structure.

b. a company uses debt to increase the expected rate of return to shareholders.

c. interest on debt needs to be paid even when operating performance declines.

d. None of the above.

Hadley company pays dividends of $9.5 per share on its preference shares, which have a par value of $100 each share. If the current market price of preference share is $73, what will be the cost of Hadley preference shares?

Select one:

a. 8%

b. 9.5%

c. 11%

d. 13%

A trade-off between the benefits of debt finance and the costs of financial distress may lead to a company increasing its debt/equity ratio because

Select one:

a. of the low probability of encountering severe financial difficulties.

b. its existing debt/equity ratio is high.

c. the expected increase in financial distress is expected to outweigh the tax benefits.

d. agency costs of equity increase as the level of debt increases