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On average, the expected return on debt is lower than the expected return on equity because equity has greater dispersion (variability) of returns. O True O False

Financial Accounting Intro Concepts Meth/Uses

14th Edition

ISBN:9781285595047

Author:Weil

Publisher:Weil

Chapter7: Introduction To Financial Statement Analysis

Section: Chapter Questions

Problem 8Q

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Concept explainers

Financial Ratios

A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.

Return on Equity

The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.

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On average, the expected return on debt is lower than the expected return on
equity because equity has greater dispersion (variability) of returns.
O True
False

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The static GAP focuses on monitoring net interest income in the long term. Select one: True False
Interest costs for short-term debt are generally lower than interest costs for long-term debt because A. short-term debt is more flexible, allowing a match of short-term needs with short-term financing. B. the term structure of interest rates generally reflects an upward sloping yield curve. C. investors demand higher returns on short-term debt due to liquidity concerns. D. both A and B.
Evaluate the following statement: If the financial market is frictionless and complete, the asset with higher expected return also exhibits higher return volatility (i.e., standard deviation of returns).
The appropriate benchmark for the return on equity is: A)the weighted average cost of capital. B)the cost of equity. C)the interest free rate. D)none of the above.
6. What is the difference between yield to maturity on outstanding debt and coupon rate? Which is a better measure of cost of debt between the two? 7. How is COST OF preferred equity computed?
If the liquidity preference hypothesis is true, what shape should the term structure curve have in a period where interest rates are expected to be constant?a. Upward sloping.b. Downward sloping.c. Flat.
Assume that the risk-free rate increases, but the market risk premium remains constant. What impact would this have on the cost of debt? What impact would it have on the cost of equity? How should the capital structure weights are used to calculate the WACC be determined?
The capital asset pricing model expresses the cost of equity as a function of a return on riskless assets, a market premium, and: Select one:a. Unsystematic risk.b. None of these.c. The cost of debt.d. Systematic risk.
Higher interest rates imply higher required rates of return, which is generally a negative for stock prices a. True b. False
Debt will always have a cost basis that is less than equity. OA. True B. False
An increase in the riskiness of financial securities results in a_______ in the supply of loanable funds and hence shift in the supply curve to the_______ O Decrease, leftO Decrease, rightO Increase, left O Increase, right
4. Explain or illustrate before-tax cost of debt and after-tax cost of debt. 5. What are the relationships between: a) interest rate and cost of debt; b) default risk and cost of debt; and c) bond rates and interest rates? 6. What is the difference between yield to maturity on outstanding debt and coupon rate? Which is a better measure of cost of debt between the two? 7. How is COST OF preferred equity computed?