1. The way a company finances its assets and operating activities is its
a. capital structure.
b. financial leverage.
c. return on equity.
d. present value.
2. Honey Farms Company reported the following information.
Net sales $ 85
Net income 10
Total assets 103
Total liabilities 41
Stockholders’ equity 62
Return on equity is
3. Financial leverage always
a. increases profits.
b. decreases profits.
c. increases risk.
d. decreases risk.
4. Which of the following ratios is an indicator of liquidity?
a. Debt to assets
b. Current assets to current liabilities
c. Assets to equity
d. Net income to equity
5. Financing with capital leases and financing with preferred stock are similar in that both
a. require the payout of fixed amounts each period.
b. increase the amount of net income available to common stockholders.
c. increase the riskiness of the firm’s common stock.
d. cause cash flow from operations to be smaller than it otherwise would be.
6. At year end, J. J. Walker Company had total assets of $90,000 and total stockholders’ equity of $50,000. The firm’s return on assets was 12% for the year. What were net income and return on equity?
Net Income Return on Equity
a. $4,800 …………………….. 9.6%
b. $6,000 …………………… 12.0%
c. $10,800 ………………….. 21.6%
d. $16,800 ………………….. 33.6%
7. Crispy Chips, Inc. earned net income this past year of $100,000 on assets of $1.9 million and stockholders’ equity of $1.2 million. To raise $500,000 of additional capital, Crispy can either issue long-term debt paying 9% interest or issue additional common stock. Use of the new capital should raise net income, before considering any new interest cost, by $68,000. To maximize return on equity, Crispy should
a. not issue any new debt or equity.
b. issue new equity only.
c. issue new debt only.
d. issue half in new equity and half in new debt.
8. High amounts of financial leverage are most common for companies with
a. small proportions of plant assets and stable earnings.
b. large proportions of plant assets and stable earnings.
c. small proportions of plant assets and unstable earnings.
d. large proportions of plant assets and unstable earnings.
9. Low dividend payout ratios are common for companies
a. with low growth potential.
b. in stable industries.
c. with high growth potential.
d. with stable earnings.
10. If a company is having difficulty paying interest and principal on its debt, creditors should be particularly concerned with
a. its return on assets.
b. its return on equity.
c. its debt to equity ratio.
d. its cash flows.
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