Question

Which of the following is not an advantage of a company using equity rather than debt to finance a project?

A. Interest always takes more cash than does paying dividends.

B. Dividends do not need to be paid.

C. Equity does not need to be repaid whereas debt does.

D. Interest and Dividends are tax deductible.

A note of caution in interpreting the debt ratio is that

A. all debt decreases liquidity ratios.

B. financing arrangements, such as leases, may be off-balance sheet arrangement and not be classified as debt on the balance sheet.

C. financing arrangements, such as leases, may be classified as debt when in fact they do not require interest payments.

D. long-term debt may be inflated because of a desire to reduce the current ratio.

The return on assets ratio measures

A. how well a company manages its assets.

B. how well a company’s assets create sales revenue.

C. how well assets have been employed in conducting the business.

D. how well current assets are used to provide cash for the purchase of long-term assets.

The return on common stockholders’ equity measures

A. how well operations have provided funds to common stockholders.

B. how well the funds provided by common stockholders have been used to generate a return for the company.

C. how well the funds provided by common stockholders have been converted to cash.

D. how liquid a company is.

Answer 1

1. Which of the following is not an advantage of a company using equity rather than debt to finance a project? The first three are advantage of using equity than debt. Interest are tax deductible, bit dividends are not. Hence Option D is not an advantage of using Equity.
2. A note of caution in interpreting the debt ratio is that: Operating leases are tools utilised by some business to show lease rental expense and record nothing in balance sheet, thus have an healthy debt ratio. Hence Option B is correct
3. A note of caution in interpreting the debt ratio is that:
4. The return on assets ratio measures: Return on assets is used to show how efficiently the company has utilized its assets to generate the returns for the company. Hence Option C is correct.
5. The return on common stockholders’ equity measures: Return on common shareholders' equity is used to show how efficiently the company has used the funds contributed by common stockholders to earn the returns for the company. Hence Option B is correct.