The Company Controller Asked Jade to Determine If It Could

question 20

Multiple Choice

The company controller asked Jade to determine if it could borrow more money for an expansion project. When she calculated a leverage ratio, she determined that the company already had 1.5 times as much debt as equity. Do you agree with her assessment that the company should back off with borrowing more funds at this time?

• A) Yes, but if the company would increase sales, it could go ahead with borrowing more funds.
• B) Not necessarily. She should investigate the debt to equity ratios of other firms in the same industry.
• C) Yes, but the firm should pursue equity investment until the ratio equals 1:1.
• D) Not necessarily. In poor economic times, it is good financial strategy for a firm to be highly leveraged.

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Definitions:

Central Limit Theorem

A statistical theory that states that given a sufficiently large sample size from a population with a finite level of variance, the mean of all samples from the same population will be approximately equal to the mean of the population.

Sample Mean

The average value of a sample subset of a larger population, used as an estimate of the population mean.

Point Estimate

A single value estimate for a population parameter derived from a sample.