Zoey Was Asked by the Company Controller to Determine If

question 350

Multiple Choice

Zoey was asked by the company controller to determine if the company 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:

Individual Debts

Financial obligations or amounts of money that are owed by a single person, as opposed to those owed by a group or company.

Chapter 13

A section of the U.S. Bankruptcy Code that allows individuals with a regular income to reorganize their debts, creating a plan to repay all or part over a period of time.

Societal Cultures

The shared values, norms, behaviors, and artifacts that characterize different groups or societies.

Organizations

Organizations are collections of people working together to achieve a common purpose.