Question

11) Which of the following statements is true about the debt to equity ratio?

The greater the debt to equity ratio the smaller the opportunity to increase the return on equity of a firm through financial leverage.

The lower the debt to equity ratio the higher the risk that financial leverage will have a negative impact on a firm's return on equity.

The size of a of a company's debt to equity ratio is directly related to amount of a firm's sales.

The greater the debt to equity ratio the greater the chance the firm will not meet its debt obligations.

12)Badger Corp is trying to decide whether to buy a new machine with a price of $40,000. Their analysis indicates the machine will generate annual cash flows of $11,000 for each of the next 6 years. The rate of return expected of any investment Badger make is 9%. Should Badger purchase the machine?

Answer 1

Solution:-

11) Which of the following statements is true about the debt to equity ratio:-

D. The greater the debt to equity ratio the greater the chance the firm will not meet its debt obligations.

Explanation:-

In general, a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations. However, low debt-to-equityratios may also indicate that a company is not taking advantage of the increased profits that financial leverage may bring.

12)Badger Corp is trying to decide whether to buy a new machine with a price of $40,000. Their analysis indicates the machine will generate annual cash flows of $11,000 for each of the next 6 years. The rate of return expected of any investment Badger make is 9%. Should Badger purchase the machine:-

PV of cash inflow 11,000 * PVAF (9%, 6 years) = 11,000 * 4.4859	49,345
Less Initial cost	40,000
NPV	9,345

Badger should purchase the machine due to positive NPV.