Assignment 04 - Analysis of Financial Statements Acti Due on Tomorrow at 1 1 :59
ID: 2806125 • Letter: A
Question
Assignment 04 - Analysis of Financial Statements Acti Due on Tomorrow at 1 1 :59 PM PST 4. Debt management ratios Aa Aa Companies have the opportunity to use varying amounts of different sources of financing to acquire their assets, including internal and external sources, and debt (borrowed) and equity funds. Aunt Dottie's Linen Inc. reported no long-term debt in its most recent balance sheet. A company with no debt on its books is referred to as: A company with no leverage, or an unleveraged compay 0 A company with leverage, or a leveraged company Which of the following is true about the leveraging effect? O Interest on debt is a tax deductible expense, which means that it can reduce a firm's taxable income and tax obligation Interest on debt can be deducted from pre-tax income, resulting in a greater taxable income and a smaller available operating income. Influenced by a firm's ability to make interest payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with times-interest-earned ratios (TIE)Explanation / Answer
a)
A company with no debt in its books is referred as "a company with no leverage or an unleveraged company"
b)
A levered company has long-term debt which has a cost as interests. This interest is a tax-deductible expense, it deducts from EBIT before adjusting taxes. Hence, it reduces income before tax that causes to reduce the total tax obligation.
Therefore, interest on the debt is tax deductible expense, which means the firm can reduce firm's taxable income and tax obligation.
c)
High times-interest-earned ratios.