Question

When will increasing your financial leverage cause an increase in growth of equity?

What are the three types of demands/needs for liquidity and give an example of each?

True, False, Uncertain and Why? A farmer would want to try to minimize his taxes if he wants his equity to grow fast.

Answer 1

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Question:

Answer:

When will increasing your financial leverage cause an increase in growth of equity?

Equity = Total assets - Total debt

ROE = Net Income / Shareholder's Equity

Net income is the income after tax, interest and other expenses. So, when debt is comparatively high its negatively affect to the net income. Its also increase risk within the firm. High debt to equity ratio negatively affect the stock price of the firm. But other side increasing debt increases stock volatility, increasing its level of risk which in turn increases returns. The effective cost of debt is lower than equity and financing firm by debt financing decrease cost of capital for the firm. The firm borrow to fulfil their business needs like, expansion or payment of other liability increase the revenue for company that increase net income for the firm. leverage can also help in forecasting cash flows that strengthen the firm and increase growth of equity because cash flow play an important role in equity valuation. So, if a firm has highly equity exposure and company is financially strong then increasing debt exposure help out in increasing growth of equity.

What are the three types of demands/needs for liquidity and give an example of each?

three types of demands/needs for liquidity are - 1). transaction motive, 2). precautionary motive, and 3). the speculative motive.

1). Transaction motive : It is demand for current transactions for a firm like- wages

2). Precautionary motive: It is demand for emergency like- unseen losses (business loss)

3). Speculative motive: It is demand for take advantage of future changes like- change in interest rate or exchange rate

True, False, Uncertain and Why? A farmer would want to try to minimize his taxes if he wants his equity to grow fast.

I think try to minimize his taxes if he wants his equity to grow fast is uncertain. Reducing taxes help you out to increasing net income but if your gross income or operating profits is not supportive or low then decreasing taxe do not support in equity to grow fast.

Thank You