Financial Leverage: a.can impact profitability. b.increases when stock is issued. c.is a sign of financial weakness. d.All of the above. e.None of the above.
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Financial Leverage:
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- Explain the effect of D/E on asset returns, equity returns (assuming that cost of debt is not affected), asset beta and equity beta (assuming that debt beta is zero). Should an investor choose to invest in a stock of a company with high or low D/E, or why expected returns on these stocks are equivalent, although they are not equal?a. What is the relationship between the expected return of a stock and its fair expected return? When is a stock underpriced, overpriced, or fairly priced? b. Explain what happens to the firm’s cost of equity, cost of debt, and cost of capital when the firm increases the amount of debt in its capital structure. Assume all Modigliani and Miller assumptions hold and that there are no taxes. c. How can we use the internal rate of return to evaluate whether we should pursue a specific project? Should we pursue a project when the cost of capital is higher than the internal rate of return?is(are)the reason(s) for profit maximization not a reasonable goal for firms. a. Profit concept ignores timing of the returns b. Profit concept ignores the cash flow available to stock holders c. Profit is risky and can be some times loss d. All the above
- Which of the following statements is correct? A. The optimal dividend policy is the one that satisfies management, not shareholders. B. The use of debt financing has no effect on earnings per share (EPS) or stock price. C. Stock price is dependent on the projected EPS and the use of debt, but not on the timing of the earnings stream. D. The riskiness of projected EPS can impact the firm's value. E. Dlvidend policy is one aspect of the firm's financial policy that is determined solely by the shareholders. Reset SelectionWhen is potentially dilutive security anti-dilutive? A. The definition of diluted earnings per share requires that diluted earnings per share reflect the best-case scenario or maximum potential decrease in EPS. So if security decreases the earnings per share ratio, it is, by definition, anti-dilutive. B. The definition of diluted earnings per share requires that diluted earnings per share reflect the worst-case scenario or maximum potential decrease in EPS. So if security increases the earnings per share ratio, it is, by definition, anti-dilutive. C. The definition of diluted earnings per share requires that diluted earnings per share reflect the best-case scenario or maximum potential increase in EPS. So if security decreases the earnings per share ratio, it is, by definition, anti-dilutive. D. The definition of diluted earnings per share requires that diluted earnings per share reflect the worst-case scenario or maximum potential increase in EPS. So if a security…The use of financial leverage by the firm has a potential impact on which of the following? (1) The risk associated with the firm's operations. (2) The risk experienced by the stockholders (3) The variability of operating income (4) The variability of net income (5) The probability of going bankrupt Group of answer choices: 1, 2, 3 1, 3, 5 3, 4, 5 2, 3, 4 2, 4, 5
- What is slippage in strategy implementation? Falling stock price Strategic intentions get distorted on their way to implementation Raising funds through debit Both and b A and b and cRegarding the EPS fallacy, which of the following statements is correct: a. When a company issues debt and uses all the proceeds to buy back equity and as a result EPS rises, the fact that some analysts associate the rise of EPS to an improvement in the company's performance is called the EPS fallacy. b. All given statements are correct. c. One of the reasons behind the EPS fallacy is not to take into account that when EPS rises mechanically due to a leveraged recapitalisation, the cost of equity also rises in the same proportion and the share price does not change (assume no taxes and perfect capital markets world). d. Suppose companies A and B have identical cash flows but different capital structures. Suppose further that EPS(A) > EPS(B). We cannot conclude that A has a better performance than B.Which of the following statements is false?(a) The quickest way to determine whether a firm has too much debt is to calculate the debt-to-equity ratio.(b) The best guideline to determine the firm's liquidity is to calculate the current ratio.(c) From the investor's point of view, the rate of return on common equity is a good indicator of whether the firm is generating an acceptable return to the investor.( d) We can determine the operating margin by expressing net income as a percentage of total sales.
- A firm that is increasing its capital structure leverage and increasing profitability will likely experience a (an) a. increasing value-to-book ratio b. decreasing return on assets c. volatile price-earnings ratio d. None of these answer choices are correct.What does signaling theory say about capital structure? Answers: Investors believe managers only issue stock when stock is overvalued which is a positive signal Investors believe managers only issue stock when stock is overvalued which is a negative signal Investors believe managers only issue stock when stock is undervalued which is a positive signal Investors believe managers only issue stock when stock is undervalued which is a negative signalChoose option a,b,c,d,e for the following: Question 6 - A higher financial risk: a. Arises when the debt – equity ratio is reduced. b. Can avert financial distress. c. Will cause the shareholders to expect lesser return. d. Indicates an inefficient use of fixed cost assets. e. Indicates an inefficient use of fixed cost funds.
