Remember that managers should always be concerned with creating value. In financ
ID: 2744655 • Letter: R
Question
Remember that managers should always be concerned with creating value. In financing decisions, value is created when earnings or efficiencies are enhanced, or when financial risk is reduced. Value can also be created by increasing financial leverage. A firm with $100 million in assets needs to finance an additional $15 million of asset growth. It has enough debt capacity to cover the new funding needed, but that is all it could reasonably hope to afford. The firm's stock price is near record high. The current dividend policy calls for a payout of 10%, and the firm's most recent annual earnings were $10 million. The company expects to experience rapid growth during the next 5 years.
A firm seeks to save some debt capacity
A. for unexpected lucrative investments.
B. because it can be obtained faster than new equity.
C. for unforseen disasters, where the firm's survival is at stake.
D. B and C E. A and B
Explanation / Answer
The Net Assets = $ 100 million
Additional Finance requuired = $ 15 million
Debt Capacity = enough debt capacity to cover $ 15 million
The Company expects to experience rapid growth during next 5 years,
Based on tha above,
A firm seeks to save some debt capacity, because it can be obtained faster than new equity.
The Answer is " B "
The firm expected lucrative investments and able to continue the current dividend payout = 10%
The debt can be obtained faster than equity.