We calculate financial leverage as follows. Financial Leverage =Total Asset/ Equity Financial Leverage = Total Assets/Share...

Question

Question

We calculate financial leverage as follows.

Financial Leverage =Total Asset/ Equity

Financial Leverage = Total Assets/Share Holders Equity

Which one is correct or most acceptable?

Answer 1

Answer #1

Financial leverage shows the extent to which a company is financed by debt.

Equity shows ownership interest whereas shareholder's equity shows how much the company's operations are financed by equity.

Hence, it is more acceptable to use shareholder's equity in the formula to calculate financial leverage.

Answer 2

Similar Homework Help Questions

When we calculate dividend per share(DPS),do we consider dividend paid to both equity share holders and...

When we calculate dividend per share(DPS),do we consider dividend paid to both equity share holders and preference share holders or otherwise?
Which of the following generally indicates a negative change? The asset turnover increases. The financial leverage...

Which of the following generally indicates a negative change? The asset turnover increases. The financial leverage decreases. The return on equity increases. The earnings per share increases.
The impact of financial leverage on return on equity and earnings per share Consider this case:...

The impact of financial leverage on return on equity and earnings per share Consider this case: Rinsemator Group. is considering a project that will require $350,000 in assets The project is expected to produce an EBIT (earnings before interest and taxes) of $55,000 · The project will be financed with 100% equity . There will be 25,000 shares of common equity outstanding · The company faces a tax rate of 30% Using the preceding information, what will be Rinsemator Group.'s...

Exercise 4: Consider a financial institution with • Assets of 120 AUD • Uninsured deposits of...

Exercise 4: Consider a financial institution with • Assets of 120 AUD • Uninsured deposits of 50 AUD • Insured deposits 50 AUD • Equity 20 AUD a) The financial institution faces a loss of 10 AUD. Calculate the asset value, the value to the previous uninsured deposit holders, insured deposit holders, and equity holders. Does the financial institution run into bankruptcy? Does the deposit insurance have to pay? b) The financial institution faces a loss of 30 AUD. Calculate...
When we calculating ROE,do we consider both equity share holders fund and preferential share holders fund?

When we calculating ROE,do we consider both equity share holders fund and preferential share holders fund?
The extent of financial leverage in a firm Debt ratios measure the proportion of total assets...

The extent of financial leverage in a firm Debt ratios measure the proportion of total assets financed by a firm's creditors. Cute Camel Woodcraft Company has a debt-to-equity ratio of 3.80, compared to the industry average of 3.04. Its competitor Purple Lemon Woodcrafters, however, has a debt-to-equity ratio of 5.70. Based on what debt-to-equity ratios imply, which of the following statements is true? Purple Lemon's creditors face lesser risk than the average financial risk in the industry. Purple Lemon has...

Explain hol return on net operating assets (RNOA) and financial leverage (FLEV) affect Return on Equity...

Explain hol return on net operating assets (RNOA) and financial leverage (FLEV) affect Return on Equity (ROE). Is greater FLEV always better?
A company has a financial leverage ratio of 2.0, net profit margin of 3%, fixed asset...

A company has a financial leverage ratio of 2.0, net profit margin of 3%, fixed asset turnover of 10.0, total assset turnover of 4.0, and a debt to equity ratio of 1.0. What is ROE?
3. If net profit is 3 percent, asset turnover is 6, and financial leverage is 2.1....

3. If net profit is 3 percent, asset turnover is 6, and financial leverage is 2.1. what is the return on assets? What does your result mean in your own words? The Card Shoppe last year had a gross margin of $1,500,000, a net profit of $250,000, and net sales were $2,000,000. What was the Card Shoppe's net profit margin? What does your result mean in your own words? A retailer has a net profit of $1,000,000, total assets of...

3. If net profit is 3 percent, asset turnover is 6, and financial leverage is 2.1....

3. If net profit is 3 percent, asset turnover is 6, and financial leverage is 2.1. what is the return on assets? What does your result mean in your own words? The Card Shoppe last year had a gross margin of $1,500,000, a net profit of $250,000, and net sales were $2,000,000. What was the Card Shoppe's net profit margin? What does your result mean in your own words? A retailer has a net profit of $1,000,000, total assets of...