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CMA Intermediate · Financial Management and Business Data Analytics · Capital Structure and Capital Stacking

Which of the following factors would generally allow a company to use a HIGHER proportion of debt in its capital structure?

Stable and predictable sales and earnings let a company carry more debt, because it can reliably meet fixed interest and repayment obligations. Volatile profits, mostly intangible assets and a low tax rate all reduce the attractiveness or capacity for borrowing.

  1. AStable and predictable sales and earningsCorrect
  2. BHighly volatile operating profits
  3. CLow asset tangibility with mostly intangible assets
  4. DA low tax rate that reduces the value of interest deductibility

Explanation

Stable earnings assure regular interest and principal payment, so the firm can bear higher fixed charges. Volatile profits, intangible assets and lower tax shield all reduce debt capacity.

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