ASSighment 0 Analysis of FInanclal Statéments 4. Debt management ratios Aa Aa Co
ID: 2818241 • Letter: A
Question
ASSighment 0 Analysis of FInanclal Statéments 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. which of the following is considered a financially leveraged firm? O A company that uses debt to finance some of its assets O A company that uses only equity to finance its assets 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. O 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 debt ratios ayer WIN 30 108 2004-2010 Grade t Naw Save & Continue O Type here to search
Explanation / Answer
Q. Which of the following is considered a financially leveraged firm?
Ans. A company that uses debt to finance some of its assets.
Explanation: Financial leverage is a technique that involves the use of borrowed funds to purchase an asset.
Q. Which of the following is true about the leveraging effect?
Ans. Interest on debt is a tax deductible expense, which means that it can reduce a firm's taxable income and tax obligation.
Explanation: Unlike equity, the interest and charges on debt and business loans are tax deductible.
Q. Influenced by a firm's ability to make payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with LOW debt ratios.
Explanation: The lower the debt ratio, the greater the cushion against creditors' losses in the event of liquidation i.e., a low debt ratio helps to protect the creditors from loss in a case if the firm undergoes liquidation.