Question

Correctly answer each part of question 4

4. Debt management ratios Aa Aa Companies have the opportunity to use varying amounts of different sources of financing to acquire their assets, including internal and external sources, and debt (borrowed) and equity funds Which of the following is considered a financially leveraged firm? O A company that uses debt to finance some of its assets O A company that uses only equity to finance its assets Which of the following is true about the leveraging effect? Under economic growth conditions, firms with relatively more leverage will have higher expected returns O Under economic growth conditions, firms with relatively low leverage will have higher expected returns. Influenced by a firm's ability to make interest payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with times-interest-earned ratios (TIE)

Answer 1

1st part.

A. A company that uses debt to finance some of its assets.

(a company which uses debt to finance some of its assets is considered a financially leveraged firm).

2nd part:

A. under economic growth conditions, firms with relatively more leverage will have higher expected returns.

(this is because of fixed interest component, which will enable more earnings to be made available to equity share holders)

3rd part:

Higher

influenced by a firm's ability to make interest payments and payback its debt, if all else is equal, creditors would prefer to given loans to companies with HIGHER times interest earned ratios (TIE).

(higher times interst earned ratio is an indication of higher funds available to make interest payments).