[amp_mcq option1=”Reduces DFL” option2=”Increases DFL” option3=”Increases financial risk” option4=”Both a and b” correct=”option1″]<\/p>\n
The correct answer is: A. Reduces DFL<\/strong>.<\/p>\n DFL stands for “degree of financial leverage”. It is a measure of how sensitive a company’s earnings per share (EPS) is to changes in its EBIT. A higher DFL indicates that a company’s EPS is more sensitive to changes in its EBIT, and vice versa.<\/p>\n Preference shares are a type of equity that ranks above common shares in terms of dividend payments. This means that if a company is unable to pay its dividends, preference shareholders must be paid before common shareholders.<\/p>\n Debt finance is a type of financing that involves borrowing money from a lender. The lender will charge interest on the loan, which must be paid back over time.<\/p>\n The use of preference share capital as against debt finance reduces a company’s DFL. This is because preference shareholders have a higher claim on a company’s assets than debt holders. If a company is unable to pay its debts, the debt holders will be the first to lose money. However, if a company is unable to pay its preference dividends, the preference shareholders will only lose their investment.<\/p>\n As a result, the use of preference share capital reduces a company’s risk of financial distress. This is because preference shareholders are less likely to force a company into bankruptcy than debt holders.<\/p>\n Here is a brief explanation of each option:<\/p>\n [amp_mcq option1=”Reduces DFL” option2=”Increases DFL” option3=”Increases financial risk” option4=”Both a and b” correct=”option1″]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[945],"tags":[],"class_list":["post-48423","post","type-post","status-publish","format-standard","hentry","category-financial-management","no-featured-image-padding"],"yoast_head":"\n\n