To Maximize the Benefits of Using Financial Leverage, a Firm

question 88

Multiple Choice

To maximize the benefits of using financial leverage, a firm should

• A) strive to minimize their cost of capital.
• B) avoid securing funds through long-term debt financing.
• C) limit their investments to projects with minimum risk levels.
• D) incorporate in states with relatively low tax rates.

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Definitions:

Profitability Ratios

Financial metrics used to evaluate a company's ability to generate profit relative to its revenue, assets, equity, or other financial metrics.

Net Income

The total profit of a company after all expenses and taxes have been deducted from total revenues; also known as net earnings or net profit.

Equity

Represents the shareholder's ownership interest in a company, calculated as the difference between total assets and total liabilities.

Debt-Equity Ratio

An evaluation of corporate leverage, calculated by the division of a company's total liabilities by the equity of its shareholders.