COST ACCOUNTING
PERFORMANCE MEASUREMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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increase the proportion of long term debt to decrease the cost of capital
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increase the proportion of short term debt to decrease the cost of capital
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decrease the proportion of common stock equity to decrease financial risk
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increase the proportion of common stock equity to decrease financial risk
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Detailed explanation-1: -risk faced by equity holders of firms with debt. Risk means uncertainty and financial risk means if a company borrows a certain amount, it must pay interest relative to the said borrowings. This interest reduces earnings available for equity holders.
Detailed explanation-2: -Financial Risk: Financial Risk as the term suggests is the risk that involves financial loss to firms. Financial risk generally arises due to instability and losses in the financial market caused by movements in stock prices, currencies, interest rates and more.
Detailed explanation-3: -Leverage can increase the expected return by using more money in investment through borrowing. At a certain degree of FL (financial leverage), a company’s return on equity (ROE) increases because the use of leverage raises stock volatility, which both raises risk and returns.
Detailed explanation-4: -An increase in the personal tax rate is likely to increase the debt ratio of the average corporation.