Match the correct terms to the correct definition and in part B correct the bold letters if they are wrong

Select the correct term for each of the following descriptions. These are not necessarily complete definitions, but there is only one possible answer for each term.

Descriptions	Terms
The level and nature of risk attributable to a firm’s activities and operations, and ignoring the risks associated with the firm’s capital structure.	Asymmetric information
The situation in which outsiders, such as external shareholders, credits, suppliers, and customers have less and inferior information about a firm’s past, current, and future conditions and prospects, compared to the firm’s managers.	Business risk
The extent to which a firm’s cost structure contains a large proportion of fixed costs, which raises its level of business risk if the firm’s sales decline.	Capital structure
This practice of employing a large proportion of fixed-cost sources of financing, such as debt securities and preferred stock, exposes a firm’s stockholders to more business risk.	EPS indifference point
The ability of a firm to borrow money at a reasonable cost when good investment opportunities arise because it currently less debt than that suggested by its optimal capital structure.	Financial leverage
An action taken by a firm’s management that provides clues to investors about how management views the firm’s prospects.	Financial risk
The risk that is borne solely by the firm’s shareholders, and results from a firm’s decision to finance its assets using fixed-cost sources of capital, including debt securities and preferred stock.	Operating leverage
The level of sales at which a firm’s earnings per share (EPS) are the same, regardless of which of two alternative capital structures are compared.	Optimal capital structure
The mix of debt, preferred stock, and common stock that maximizes the price of the firm’s common stock.	Reserve borrowing capacity
The mix of debt, preferred stock, and common stock that finances a firm’s assets.	Signal

In making capital structure decisions, managers must manage the firm’s level of operating leverage and financial leverage, and the firm’s exposure to business and financial risks. This requires knowledge of a firm’s degree of operating leverage (DOL), financial leverage (DFL), and total leverage (DTL).

Complete the following table by identifying the correct formula and completing the interpretative statement.

Formula	Interpretation
Degree of operating leverage (DOL)
EBIT / Gross profit	An index for a specific level   of sales that measures the effect of a change in sales (S) on the firm’s operating income (EBIT). Alternatively, it is an indicator of the riskiness (variability) of a firm’s EBIT to the use of fixed costs (F) in the firm’s cost structure.
Degree of financial leverage (DFL)
% ∆EPS / % ∆EBIT	An index for a specific range of sales that measures the effect of a change in EBIT on a firm’s earnings per share (EPS). At a constant level of sales, the DFL value will vary with a change in the amount of interest expense (I) incurred. This implies that the DFL is an indicator of a firm’s financial   risk.
Degree of total leverage (DTL)
% ∆EBIT / % ∆Sales	An index of the firm’s total risk resulting from its use of operating and financial leverage. Stated differently, it is an indicator of the consequences for the firm’s EPS for its use of fixed   operating and financing costs