1) Company A uses long-term debt to finance its assets, and company B uses capit
ID: 2771325 • Letter: 1
Question
1) Company A uses long-term debt to finance its assets, and company B uses capital generated from shareholders to finance its assets, and company B uses capital generated from shareholders to finance its assets. Which company would be considered a financially leveraged firm?
A) Company A
B) Comapny B
2) Which of the following is true about the leveraging effect?
A) using leverage reduces the potential of gains and losses
B) Using leverage can generate shareholder wealth, but if a company fails to make payments on its debt, crdit default can reduce shareholder wealth.
3) The US tax Structure influcences a firm's willingness to fianance with debt. The tax structure ______ more debt
A) discourages
B) encourages
Explanation / Answer
Solution:
Question 1
The answer to the above question is
A) Company A
As, Company A uses debt instead of new equity. So that the wealth of shareholders may increase
Question 2
The answer to the above question is
B) Using leverage can generate shareholder wealth, but if a company fails to make payments on its debt, credit default can reduce shareholder wealth.
As use of debt increases risk.
Question 3
B) Encourages
As, Income tax helps in leveraging thus firm's willingness encouages to finance with debt.
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