in 20x2, C Co's total liabilities were $10,742 million and shareholders' equity was $8403 million, In 20x2, P Co's total liabilties were $16.259 million andtheir shareholders' equity was $6,401 milion. Which of the following statements is false?Multiple ChoiceP Co is a much higher leveraged company providing greater financial risk for investors but potential higher retut on owners investment toIts shareholdesC Co's debt to equity ratio was 1.28 and P Co's was 2.54C Co has only about 561% of its assets financed by debt while P Co has about 71.8% of assets financed by debtC Co is more profitable than P Co

Debt and equity form the company’s capital structure or how it finances its operations. Debt and…

Answered: P Co is a much higher leveraged company…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The higher the debt-to-equity ratio, the less debt a company is using to finance its assets. True False
Assume that Firms U and L are in the same risk class and that both have EBIT=$500,000. Firm U uses no debt financing, and its cost of equity is rsU=14%. Firm L has $1 million of debt outstanding at a cost of rd=8%. There are no taxes. Assume that the MM assumptions hold. Graph (a) the relationships between capital costs and leverage as measured by D/V and (b) the relationship between V and D. Now assume that Firms L and U are both subject to a 40% corporate tax rate. Using the data given in Part b, repeat the analysis called for in b(1) and b(2) using assumptions from the MM model with taxes.
A certain firm with no debt that operates in perfect capital markets currently generates a 4.5% return for its shareholders and can issue a debt cost of 3%. Determine the firm’s ROE at the following debt-to-equity ratios: D/E ratio .5 ROE = ________________________________ D/E ratio 1.0 ROE = ________________________________ D/E ratio 1.5 ROE = ________________________________
To illustrate the effects of financial leverage for PizzaPalace’s management, consider two hypothetical firms: Firm U (which uses no debt financing) and Firm L (which uses $4,000 of 8% interest rate debt). Both firms have $20,000 in net operating capital, a 25% tax rate, and an expected EBIT of $2,400. (1) Construct partial income statements, which start with EBIT, for the two firms. (2) Calculate NOPAT, ROIC, and ROE for both firms. (3) What does this example illustrate about the impact of financial leverage on ROE? (4) Why did leverage increase ROE in this example?
Corporate Finance Company A and Company B’s revenues and variable expenses (e.g. COGS) are identical, butA’s fixed expenses (e.g. SG&A) are smaller than B’s (see table below). Assuming the size of theirrevenues are 100% correlated with the strength of the economy, would A’s equity Beta be smaller,the same, or larger than B’s equity beta? Explain why. Strength of economy: Weak Economy Strong EconomyCompany A B A BRevenues 150 150 180 180Variable Expenses 20 20 30 30Fixed Expenses 20 100 20 100EBT 110 30 130 50
Q.A low debt ratio, compared to other industry competitors with similar operating leverage, most likely means the firm has A. a higher cost of capital than the competition. B. a higher EVA than the competition. C. a lower bond rating than the competition. D. none of the above.
Consider two firms – Alpha Co. and Omega Co. – that operate in the manufacturing of mountain bikes and have the same degree of operating leverage. Alpha Co. and Omega Co. have, respectively, no debt and 50 percent debt in their capital structure. Which of the following statements is most accurate? Compared to the Alpha Co., the Omega Co. has: a. the same sensitivity of net income to changes in operating income. b. a lower sensitivity of net income to changes in unit sales. c. the same sensitivity of operating income to changes in unit sales.
Alpha Co. has a debt-equity ratio of 0.6, a pretax cost of debt of 7.5 percent, and an unlevered cost of equity of 12 percent. What is Alpha's cost of equity if you ignore taxes? Multiple choice question. 16.5% 9.3% 14.7% 12% Explain why
True or False: It is free for a company to raise money through retained earnings, because retained earnings represent money that is left over after dividends are paid out to shareholders. False True The cost of equity using the CAPM approach The current risk-free rate of return (TRF) is 3.86% while the market risk premium is 6.63%. The Monroe Company has a beta of 0.92. Using the capital asset pricing model (CAPM) approach, Monroe's cost of equity is The cost of equity using the bond yield plus risk premium approach The Lincoln Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Lincoln's bonds yield 11.52%, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 4.95%. Based on the bond-yield-plus-risk-premium approach, Lincoln's cost of internal equity is: 19.76% 16.47% 15.65% O 18.12%
Sunshine Company began operations on January 1, 2020. In its first year, the following transactions occurred: 1. Issued common shares for $308,000 cash. 2. Borrowed $64,000 from the bank for a five-year term. 3. Purchased equipment for $202,000 cash. 4. Purchased supplies, on account, for $6,000. 5. Sales on account amounted to $106,000. 6. Collected $82,000 from customers for services provided. 7. Paid wages of $31,000 to employees. 8. Paid $21,500 for utilities (telephone, electricity, heat, & water). For Sunshine Company, the following adjustments are required prior to them being able to prepare financial statements for the year ended December 31, 2020. 1. The bank loan was taken out on January 1st and has an interest rate of 8%. Interest is due January 1st of the following year. 2. The equipment was purchased on January 1st and has an estimated useful life of 10 years and a residual value of $12,500. The company uses the straight-line depreciation method. 3. Wages in the amount of…
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