Chapter 4, Problem 2BCIC

According to Modigliani and Miller, what happens to the cost of equity when the firm increases its leverage? What happens to the firm's WACC?

What is the purpose of financial leverage in finance? a) To increase the company's liquidity b) To reduce the company's risk c) To increase the company's profitability d) To magnify the company's returns and risks

What do you believe is the significance of a good capital structure? What is Degree of Operating Leverage?

1. What are the advantages and disadvantages of using financial leverage? Answer from the banker’s point of view and then from the bank regulator’s point of view.

What is meant by positive financial leverage?  What about negative financial leverage?

Companies have the opportunity to use varying amounts of different sources of financing, including internal and external sources, to acquire their assets, debt (borrowed) funds, and equity funds. A) Which of the following is considered a financially leveraged firm?   A company that uses debt to finance some of its assets   A company that uses only equity to finance its assets     B) Which of the following is true about the leveraging effect?   Under economic growth conditions, firms with relatively more leverage will have higher expected returns.   Under economic growth conditions, firms with relatively low leverage will have higher expected returns.     C) Blue Sky Drone Company has a total asset turnover ratio of 8.50x, net annual sales of $40 million, and operating expenses of $18 million (including depreciation and amortization). On its balance sheet and income statement, respectively, it reported total debt of $1.75 million on which it pays a 7%…

If a firm has a relatively aggressive current asset financing policy vis-á-vis other firms in its industry, then its current ratio will probably be relatively high. Is this true? Why or why not?

In theory, should a firm be equally concerned with stand-alone,corporate, and market risk? Would your answer be the same if wesubstituted “In practice” for “In theory”? Explain your answers

If youre a financial managers, what do you think is the importance of a proper capital structure.? What is Degree of Operating Leverage and its importance.