Old Exam Questions - Capital Structure and Leverage Page 4 of 31 Pages up, but the increase in interest expense will also lead to smaller operating cash flows and a reduction in the project’s IRR. D. In a profitable firm with a degree of operating leverage greater than one, increasing sales will lead to a more than proportional increase in net income. E. Modigliani and Miller conclusively showed that the amount of debt in a firm’s capital structure is totally irrelevant, even when corporate taxes are considered. 6. Which of the following statements is most correct ? A. By its very nature, there is a symmetrical relationship between the degree of operating leverage (DOL) and the degree of financial leverage (DFL). That is, firms with a high DOL will also have a high DFL and firms with a low DOL will also have a low DFL. B. In a Miller and Modigliani world with corporate taxes, the tax shelter created by the use of additional debt will exactly offset the higher cost of equity that arises
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