21.Which of the following is NOT an advantage of financial leverage?
a.tax benefits from interest expense
b.potential increased returns to common stockholders
c.return on equity that is greater than return on assets
d.less volatile return on equity
22.Which of the following events would result in a decrease in a firm's financial leverage?
a.payment of dividends
b.issuing common stock to purchase assets
c.issuing debt to purchase assets
d.purchasing inventory on credit
23.As a firm's debt to equity ratio increases, it can be expected that
a.financial leverage will increase
b.overall financial risk will decrease
c.net income will decrease
d.the dividend payout ratio will decrease
24.Return on equity is a measure of
a.financial leverage
b.firm value
c.company performance
d.liquidity
25.Which of the following events would cause an increase in a firm's financial leverage?
a.repaying a note payable
b.issuing common stock to retire debt
c.issuing debt to purchase assets
d.purchasing an asset for cash
26.Return on equity is computed as net income divided by
a.total assets
b.liabilities plus stockholders' equity
c.contributed capital
d.stockholders' equity
27.Which of the following companies has the greatest financial leverage?
ABCD
Return on Assets2%2%3%3%
Return on Equity2%5%5%6%
a.A
b.B
c.C
d.D
28.Which of the following sets of measurements of capital structure would indicate a high degree of financial leverage?
Debt/Assets Debt/Equity Assets/Equity
a.High Low Low
b.High High Low
c.Low High High
d.High High High
29.Which of the following euqations is TRUE?
a.return on equity = return on assets x dividend payout
b.return on assets = debt to assets x net income
c.return on equity = return on assets x financial leverage
d.dividend payout ratio = net income x dividends
30.A firm's ability to meet its current cash requirements is known as
a.financial leverage
b.solvency
c.liquidity
d.measured by the debt to assets ratio