Answers
Chapter 1
1. C. Leverage multiplies losses, too, as it increases a company’s risk. Leverage multiplies both gains and losses, adding to overall risk. On the positive side, this multiplication can increase profits; in times of negative profitability, however, leverage increases the magnitude of losses.
2. B. Companies in stable, predictable industries with reliable cash flows. Because leverage increases risks, the companies most likely to have high amounts of leverage are those whose business models expose them to the least amount of risk. Companies in new industries are typically risky, so financial risk would compound that business risk.
3. D. Preferred stock dividends must be in even-numbered percentages (2 percent, 4 percent, ...
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