Which of the Following Statements Is True

question 3

Multiple Choice

Which of the following statements is true?

• A) Financial leverage should not be considered when a firm borrows money.
• B) Under the right circumstances, the use of borrowed money can improve a firm's return on owners' equity.
• C) There is no good reason for a firm to borrow money when it has cash to finance expansion.
• D) The use of borrowed money always reduces a firm's return on owners' equity.
• E) Return on owners' equity is not an important financial calculation.

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Definitions:

Direct Financing Lease

A type of lease where the lessor effectively transfers all the risks and rewards incidental to ownership to the lessee without transferring legal ownership.

Sales-Type Lease

A lease agreement where the lessor recognizes immediate profit similar to a sale, often used in the context of finance leases in accounting.

Unearned Interest: Leases

Interest that has been collected on a lease but not yet earned, often because the period it covers has not fully elapsed.

Present Value Factors

Numeric factors used in calculating the present value of future cash flows, reflecting the time value of money.