Which one of the following statements concerning financial leverage is correct? A) Financial leverage magnifies both profits and losses. B) Financial leverage increases profits and decreases losses. C) Financial leverage has no effect on a firm's return on equity. D) Increasing financial leverage will always decrease the earnings per share. F) Financial leverage refers to the use of common stock.

Which one of the following statements concerning financial leverage is correct? A) Financial leverage magnifies both profits and losses. B) Financial leverage increases profits and decreases losses. C) Financial leverage has no effect on a firm's return on equity. D) Increasing financial leverage will always decrease the earnings per share. F) Financial leverage refers to the use of common stock.

Financial Accounting Intro Concepts Meth/Uses

14th Edition

ISBN:9781285595047

Author:Weil

Publisher:Weil

Chapter7: Introduction To Financial Statement Analysis

Section: Chapter Questions

Problem 5Q

See similar textbooks

Similar questions

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 Selection
Which of the following statements is CORRECT?a.The capital structure that maximizes the stock price is generally the capital structure that also maximizes earnings per share.b.The capital structure that maximizes the stock price is generally the capital structure that also maximizes its WACC.c.The capital structure that maximizes the stock price is generally the capital structure that also minimizes its WACC.d.Since debt is cheaper than equity, increasing the debt ratio will always reduce WACC.e.When a company increases its debt ratio, the costs of equity and debt both increase. Therefore, the WACC must also increase.
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?
Which of the following does NOT directly affect a company's cost of equity? Select one: a. Return on assets b. Expected market return c. Risk-free rate of return d. The company's beta
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?
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? 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. 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?
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.
The cost of equity is easier to estimate than the cost of either debt or preferred stock. True False
A. Why is the goal of financial management to maximize the current share price of the company's stock and not the future share price?
Which of the following statements is CORRECT? Select one: a. The capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (WACC). b. The capital structure that maximizes the stock price is also the capital structure that maximizes earnings per share. c. The capital structure that maximizes the stock price is also the capital structure that maximizes the firm’s times interest earned (TIE) ratio. d. Increasing a company’s debt ratio will typically reduce the marginal costs of both debt and equity financing; however, this still may raise the company’s WACC. e. If Congress were to pass legislation that increases the personal tax rate but decreases the corporate tax rate, this would encourage companies to increase their debt ratios.
Which of the following statements is NOT true? A. Stock owners benefit from stock price increases B. Higher stock prices allow companies access to more capital C. Common stocks are not securities D. Stock prices tend to be very volatile
For purposes of measuring a firm’s leverage, should preferred stock be classified as debt orequity? Does it matter whether the classification is being made (a) by the firm’s management,(b) by creditors, or (c) by equity investors?