PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 18, Problem 21PS
Pecking-order theory* Fill in the blanks: According to the pecking-order theory,
- a. The firm’s debt ratio is determined by_____.
- b. Debt ratios depend on past profitability, because _____.
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A profitability measure of ROE is affected by the level of a firm’s debt. Thus,an investor must consider the debt-equity ratio to evaluate the firm’sprofitability. The debt-equity ratio determines a firm’s financial leverage whichindicates how much of assets the firm is able to deploy for each monetary unitof stockholders’ equity.1) Explain how the financial leverage effect can be defined as the differencebetween ROE and ROA. 2) Explain how the financial leverage effect is affected by the debt ratio and theinterest rate.
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.
Leverage is
a. The ability to earn a satisfactory return on the investments in the business.
b. The ability to pay current debts when they come due.
c. The proportion of debt to stockholders' equity.
d. Also called profit margin.
Chapter 18 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 18 - Prob. 1PSCh. 18 - Tax shields Compute the present value of interest...Ch. 18 - Tax shields Here are book and market value balance...Ch. 18 - Tax shields Look back at the Johnson Johnson...Ch. 18 - Prob. 5PSCh. 18 - Tax shields The firm cant use interest tax shields...Ch. 18 - Prob. 7PSCh. 18 - Tax shields The trouble with MMs argument is that...Ch. 18 - Bankruptcy costs On February 29, 2019, when PDQ...Ch. 18 - Financial distress This question tests your...
Ch. 18 - Prob. 12PSCh. 18 - Agency costs Let us go back to Circular Files...Ch. 18 - Agency costs The Salad Oil Storage (SOS) Company...Ch. 18 - Agency costs The possible payoffs from Ms....Ch. 18 - Prob. 17PSCh. 18 - Prob. 18PSCh. 18 - Prob. 20PSCh. 18 - Pecking-order theory Fill in the blanks: According...Ch. 18 - Financial slack For what kinds of companies is...Ch. 18 - Financial slack True or false? a. Financial slack...Ch. 18 - Debt ratios Rajan and Zingales identified four...Ch. 18 - Leverage targets Some corporations debtequity...Ch. 18 - Prob. 26PSCh. 18 - Trade-off theory The trade-off theory relies on...
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- Analyze and compare the following firms financial ratio results. Which seems to be in a better financial position? Why? Ratio Firm A Firm B Debt-To-Equity 0.65 2.23 Current Ratio 1.74 0.83 Net Profit Margin 8.07% 9.59% Return On Equity 12.81% 47.17% -arrow_forwardWhich of the following statements is usually correct? A low receivables turnover is good for the business The lower the total debt-to-equity ratio, the lower the financial risk for a firm The higher the tax rate for a firm, the lower the interest coverage ratio An increase in net profit margin with no change in sales or assets means a poor ROIarrow_forwardThe Debt to Equity ratio calculation measures Group of answer choices c. How much debt the company has for every dollar of Equity b. The amount of Assets that are financed by debt None of the above a. The ability of the company to pay its’ current obligationsarrow_forward
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- The business risk of a company is most accurately measured by the company's: a. Debt-to-equity ratio b. Efficiency in using assets to generate sales c. Operating leverage and level of uncertainly about demand output prices and competitionarrow_forwardFinancial Ratios analysis is a part of Group of answer choices Fundamental Analysis Economic Analysis Industry Analysis Technical Analysis 2. Financial Ratio Analysis does not enable us to Group of answer choices Compare financial conditions across firms of different sizes. Determine the best time when to invest in a company’s stock. Measure trends of how well a firm is performing over time. How well a firm is managing its debt.arrow_forwardIn Debtors turnover ratio , a low ratio means company collects money fast Select one: True Falsearrow_forward
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