Reading 29: Capital Structure and Leverage LOS e～ Q1-2 positive, regarding, following, statements, net

youzizhang

 

LOS e: Describe the effect of financial leverage on a company's net income and return on equity.

Q1. Which of the following statements regarding the impact of financial leverage on a company’s net income and return on equity (ROE) is most accurate?

A)   If a firm has a positive operating profit margin, using financial leverage will always increase ROE.

B)   Using financial leverage increases the volatility of ROE for a level of volatility in operating income.

C)   Increasing financial leverage increases both risk and potential return of existing bondholders.

 

Q2. Munn Industrial Components currently finances its operations with 100% equity, but is considering changing its target capital structure to 70% equity and 30% debt. Munn has a large asset base, a 20% operating profit margin, and the average interest rate on debt is expected to be 6.0%. If Munn makes the change to its capital structure and EBIT is unchanged, what is most likely the impact on Munn’s net income and return on equity (ROE) respectively?

          Impact on Net Income                 Impact on Return on Equity

 

A)   No Change                                           Increase

B)   Decrease                                              Increase

C)    Decrease                                            Decrease

梅子绿茶

 aa

梅子绿茶

 aa

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沙胖胖

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