Midterm SP09 Solutions

Midterm SP09 Solutions - 1. The debt-equity ratio is...

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1. The debt-equity ratio is another leverage ratio that compares a company's total liabilities to its total shareholders' equity . This is a measurement of how much suppliers, lenders , creditors and obligors have committed to the company versus what the shareholders have committed. To a large degree, the debt-equity ratio provides another vantage point on a company's leverage position, in this case, comparing total liabilities to shareholders' equity , as opposed to total assets in the debt ratio. Similar to the debt ratio, a lower the percentage means that a company is using less leverage and has a stronger equity position. False. You don’t know all the variables to make that statement. 2. capital budgeting: the identification of investment opportunities that have a value to the firm in excess of their cost. Which one of the following is a capital budgeting decision? deciding whether or not to open a new store Capital budgeting decisions generally: A . have long-term effects on a firm. False. Not day to day decision making. 3. Depreciation has on no impact on the operating cash flow (OCF) of a firm since it is first subtracted from total revenues minus costs of goods sold to calculate Earnings Before Interest and Taxes (EBIT) and then added back to calculate OCF. Depreciation reduces both the taxable and net income of a firm as reflected on the income statements. While depreciation itself is a noncash expense it does affect the cash flows indirectly by reducing the cash outflow for taxes. OCF: The cash generated from the operations of a company, generally defined as revenues less all operating expenses, but calculated through a series of adjustments to net income. The OCF can be found on the statement of cash flows . Also known as "cash flow provided by operations" or "cash flow from operating activities". One method of calculated OCF is: Operating cash flow = EBIT – Taxes + Depreciation True: Deprecation does not affect the OCF
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4. Based on your knowledge of the time value of money, it is a good idea to increase the amount of federal income taxes withheld from your paycheck each month so that you will get a larger refund come April
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Midterm SP09 Solutions - 1. The debt-equity ratio is...

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