Introduction to Finance

 21. 
(LO 18.7)
Briefl y explain the concepts of business risk, operating 
leverage, and fi nancial leverage in terms of an income statement.
 22. 
(LO 18.7)
How might the following infl uences aff ect a fi rm’s 
business risk? Consider each separately.
a. 
Imports increase the level of competition.
b. 
Labor costs decline.
c. 
Healthcare costs (provided for all employees) increase.
d. 
The fi rm’s proportion of social security and unemployment 
insurance taxes rises.
e. 
Adoption of new technology allows the fi rm to produce the same 
output with fewer employees.
 23. 
(LO 18.7)
How might the following infl uences aff ect a fi rm’s 
fi nancial risk? Consider each separately.
a. 
Interest rates on the fi rm’s short-term bank loans are reduced.
b. 
The fi rm refi nances a mortgage on one of its buildings at a lower 
interest rate.
c. 
Tax rates decline.
d. 
The fi rm’s stock price rises.
e. 
The fi rm suff ers a sales and operating income decline.
 24. 
(LO 18.7)
What is meant by the degree of combined leverage?
 25. 
(LO 18.7)
Describe how the degree of combined leverage (DCL) 
can be determined by the degree of operating leverage (DOL) and the 
degree of fi nancial leverage (DFL).
 26. 
(LO 18.8)
Briefl y explain how the factors of fl exibility and timing 
aff ect the mix between debt and equity capital.
 27. 
(LO 18.8)
How do corporate control concerns aff ect a fi rm’s capital 
structure?
 28. 
(LO 18.8)
If a fi rm is eligible to receive tax credits, how might 
that aff ect its debt use?

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