11.Which of the following would indicate a high degree of financial leverage?
a.a low debt to equity ratio
b.a high return on equity
c.a high debt to assets ratio
d.a low return on equity
12.To achieve the benefits from the use of high financial leverage, a company needs to generate a
a.higher level of net income
b.larger amount of assets
c.larger amount of liabilities
d.larger amount of stockholders' equity
13.Which of the following is a TRUE statement?
a.return on equity is always greater than return on assets
b.if there is any debt in a company's capital structure, the financial leverage will be greater than one
c.a company should avoid debt if it wants to improve its return on equity
d.if a company has a negative return on assets, the use of financial leverage will improve the return on equity
14.If a company with existing debt, issues common stock in order to obtain funds to buy assets
a.financial leverage will increase
b.financial leverage will decrease
c.financial leverage will remain unchanged
d.the effect on financial leverage cannot be determined
15.Given below is financial information about two firms as of the end of a recent accounting period:
Bravo Company: Easy Company:
Assets $12,180 Assets $ 18,659
Liabilities 5,608 Liabilities 7,703
Equity 6,572 Equity 10,956
Net Income 906 Net Income 1,743
Which of the following can be determined from the above information?
a.Bravo Company has a higher dividend payout ratio than Easy Company
b.Bravo Company employs more financial leverage than Easy Company
c.Bravo Company has a higher current ratio than does Easy Company
d.Bravo Company's common stock will sell for a higher price than Easy Company's
16.Which of the following is a TRUE statement about a company's use of financial leverage?
a.potential increased returns may be available to the common stockholders
b.firms in industries with low margins usually have high levels of financial leverage so as to magnify the return to common stockholders
c.financial leverage is usually the highest in firms having the largest portion of assets invested in current assets
d.the higher the volatility of earnings, the greater is the likelihood that a firm employs significant amounts of financial leverage
17.Suppose a company issues common stock to retire its debt. Which of the following effects may occur?
a.financial leverage will increase
b.financial leverage will decrease
c.financial leverage will remain unchanged
d.the effect on financial leverage cannot be determined
18.The choices a company makes about its use of financial leverage
a.is unrelated to the firm's capital structure
b.can be affected by the type of its assets it uses in its transformation process
c.will affect the return on assets
d.doesn't affect the firm's business risk
19.As the proportion of debt increases in a firm's capital structure, what happens to the firm's risk and financial leverage?
a.both decrease
b.both increase
c.risk increases but leverage decreases
d.leverage increases but risk decreases
20.Which of the following circumstances would encourage a firm to increase its degree of financial leverage?
a.interest rates are increasing economy-wide
b.the mix of company assets is changing toward use of short-term assets
c.a change in the company's business is leading to more stable earnings
d.common stock prices are increasing rapidly in the financial markets