Aa Companies have the opportunity to use varying amounts of different sources of

Question

Aa Companies have the opportunity to use varying amounts of different sources of financing to acquire their assets ncluding internal and external sources, and debt (oorrowed) and equity funds unt Dottie'sLinen inc reported no long-term ebt in itsmot recent balance sheet. A company with no debt on its O A company with leverage, or a leveraged company O A company with no leverage, or an unleveraged company Which of the following is true about the leveraging effect O using leverage can generate shareholder wealth, but if a company fails to make the interest and principal payments on its debt, credit defoult can reduce shareholder wealth O using leverage reduces a firm's potential for gains and losses Influenced by a rm's ability to make interest payments and pay back its debt, if all else is equal, ereditors woule prefer to loans to compares wth times-interest-earned ratios

Explanation / Answer

Ans. This is an interesting question , Let's start answering :

PART 1 : A company with no debt in its book is called a Company with no Leverage or Unleveraged Company.

PART 2 : First statement is correct about the Leveraging Effect. Using Leverage can generate shareholders wealth but if the company fails to make the payment of interest and principle, then it can reduce the shareholders wealth.

PART 3 : Creditors would prefer to give loans to the Companies with Higher Times Interest Earned Ratio. Because Times Interest Earned ratio indicates the ability of the company to pay back the loans , Higher the ratio , more the creditors would be willing to give loans.

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