Amalgamated Mining, Inc has very high operating leverage due to the capital intensive nature of
the steel business. The firm's CEO is concerned about the variability in the firm's EPS if sales should
drop, and decides to take action.
Which of the following will reduce the variability in the firm's EPS
for a given change in sales?
A) The CEO may issue more corporate bonds and use the proceeds to pay off short-term
liabilities.
B) The CEO may increase the firm's financial leverage and hence reduce the variability by using
non-shareholder money to support the business.
C) The CEO may decrease the firm's financial leverage, thus lowering the firm's total leverage.
D) The CEO may increase the firm's total leverage by raising money from the sale of common
stock.
C
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