Match the items of List – I with the items of List – II. List-IList-II (a) Financial leverage (i) the…
Financial leverage is the extent of use of fixed-income securities in a firm's capital structure (a-iv); Operating leverage is the extent to which fixed operating costs are…
Choose your answer
Match the items of List – I with the items of List – II.
| List-I | List-II |
|---|---|
| (a) Financial leverage | (i) the extent to which fixed costs are used. |
| (b) Operating leverage | (ii) Modigliani and Miller. |
| (c) Trade-off theory of capital structure | (iii) the riskiness inherent in the firm’s operations if it uses no debt. |
| (d) Business risk | (iv) the extent of use of fixed income securities in firm’s capital structure. |
Answer and explanation
Correct answer D
Financial leverage is the extent of use of fixed-income securities in a firm's capital structure (a-iv); Operating leverage is the extent to which fixed operating costs are used (b-i); the Trade-off theory of capital structure evolved from Modigliani and Miller's tax/bankruptcy models (c-ii); and Business risk is the inherent riskiness of a firm's operations if it uses no debt (d-iii), matching -(iv), (b)-(i), (c)-(ii), (d)-(iii).
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