Lu Lu's Catering Has a Debt Ratio Equal to

question 200

Multiple Choice

Lu Lu's Catering has a debt ratio equal to .3 and its competitor,Able's Bakery,has a debt ratio equal to .7.Determine the statement below that is correct.

• A)Able's Bakery has a smaller percentage of its assets financed with liabilities as compared to Lu Lu's.
• B)Able's Bakery's financial leverage is less than Lu Lu's.
• C)Able's Bakery's financial leverage is greater than Lu Lu's.
• D)Lu Lu's has a higher risk from its financial leverage.
• E)Higher financial leverage involves lower risk.

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Definitions:

Spot Rate

The current price in the marketplace at which a given asset, such as a currency, commodity, or security, can be bought or sold for immediate delivery.

Nominal Risk-free Return

The return on an investment without adjusting for inflation, representing the interest rate on a risk-free security.

Initial Cost

The expenditure incurred at the beginning of a project or investment, including capital investment and operational expenses when applicable.

Home Currency Approach

A method used in international finance where companies evaluate their foreign operations and transactions in their domestic currency.