Question

QUESTION 19

1. When a firm initially acquires debt to help finance its operations, it is said that the firm is:
   
   

	A.	Increasing its marketability.
	B.	Increasing its operating cash flows.
	C.	Employing financial leverage.
	D.	Increasing its liquidity.
	E.	Spending its cash flow from assets.

QUESTION 20

1. Double taxation refers to which of the following scenarios?
   
   

	A.	The corporation pays taxes on revenues and expenses.
	B.	The corporation pays taxes on earnings, and creditors pay taxes on interest received.
	C.	Both bondholders and shareholders must pay taxes.
	D.	The corporation pays taxes on its earnings, and shareholders pay taxes on dividends.
	E.	The corporation pays taxes on revenues and earnings.

Answer 1

QUESTION 19

Correct answer is C. - Employing financial leverage.

The use of more and more debt instead of equity in the total capital structure of the company to finance its operations is know as financial leverage.

Leverage includes use of debt (borrowed capital) to finance the firm's operations.

Here, the firm initially acquires debt to help finance its operations and this is employing financial leverage.

Other options are incorrect as -

- Marketability means how easily a product can be sold. The marketability of the company will increase when the products of the company can be easily sold without incurring much cost.

- Liquidity is the ability to convert a security in cash with minimal loss in its value. Here, the company is using debt it has nothing to do with liquidity.

-Increasing its operating cash flows and Spending its cash flow from assets has nothing to do with firm using debt to finance its operations.

QUESTION 20

Correct answer is D.  The corporation pays taxes on its earnings, and shareholders pay taxes on dividends.

Double taxation means the payment of tax twice on income.

Dividend is paid from the profits left after paying interest, other expenses and taxes. When the company has already paid tax on the profit and if again tax is charged on the amount paid as dividend to shareholders, this is double taxation.

(Once company is paying taxes on profit, after paying taxes left amount is divided among shareholders as dividend and then again the shareholders are taxed on dividend).

All other options are incorrect.