Learning Objective 7-6
1) Financial leverage ________.
A) is always good for companies
B) refers to using borrowed money to increase earnings
C) is risk free
D) is the degree of negotiating ability
2) If a company earns more with the money it borrows than it has to pay to borrow that money, it is called ________.
A) positive cost/benefit
B) negative cost/benefit
C) negative financial leverage
D) positive financial leverage
3) Positive financial leverage occurs when a company ________.
A) has more current assets than current liabilities
B) has a current ratio greater than 1.0 to 1
C) earns more with the money it borrows than it has to pay to borrow that money
D) has a high debt-to-equity ratio
4) The debt-to-equity ratio ________.
A) is total shareholders’ equity divided by total liabilities
B) is total liabilities divided by total shareholders’ equity
C) describes a company’s ability to make the interest payments on its debt
D) measures the firms’ ability to pay its bills on time
5) The debt-to-equity ratio ________.
A) compares the amount of creditors’ claims to the assets of the firm with owners’ claims to the assets of the firm
B) measures a firm’s ability to pay its bills on time
C) describes a company’s ability to make the interest payments on its debt
D) is total shareholders’ equity divided by total assets
6) GuGa’s Shirt Company has current assets of $48,790; total assets of $536,780; current liabilities of $43,000; total liabilities of $323,786; and shareholders’ equity of $212,994. Calculate the debt-to-equity ratio.
A) 113%
B) 60%
C) 152%
D) 66%
7) Team Shirts has current assets of $162,348; total assets of $210,837; current liabilities of $86,941; total liabilities of $101,745; and shareholders’ equity of $109,092. Calculate the debt-to-equity ratio.
A) 188%
B) 53%
C) 93%
D) 193%
8) Doolitte & Daley, Inc. has current assets of $100,000; total assets of $300,000; current liabilities of $80,000; total liabilities of $180,000; and shareholders’ equity of $120,000. Calculate the debt-to-equity ratio.
A) 125%
B) 60%
C) 40%
D) 150%
9) Which financial statement(s) do you need to use to calculate the debt-to-equity ratio?
A) only the balance sheet
B) only the income statement
C) both the income statement and the balance sheet
D) the income statement, the balance sheet, and the statement of cash flows
10) If a company earns more with the money it borrows than it has to pay to borrow that money, it has positive financial leverage.
11) The debt-to-equity ratio is calculated by dividing shareholders’ equity by total liabilities.
12) The debt-to-equity ratio compares the amount of creditors’ claims to the assets of a firm with owners’ claims to the assets of the same firm.
13) When company’s debt-to-equity ratio is greater than 100% than its current ratio must be greater than 1.0 to 1.