Which of the Following Situations Represents a Successful Use of Financial

question 148

Multiple Choice

Which of the following situations represents a successful use of financial leverage?

• A) A firm issues new shares of stock and uses the proceeds from the sale to retire its outstanding debt.
• B) A firm borrows money at 8% and earns an 11% return on its investment of these funds.
• C) A firm attracts the interest of two venture capitalists and plays one against the other to gain the best deal.
• D) A retail firm purchases merchandise at $10 and sells it for $15.

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Definitions:

Operating Assets

Assets used by a company to generate revenue, typically including property, plant, and equipment, but excluding investments and inventories.

Net Operating Income

The profit generated from a company's everyday business operations, indicating how much revenue exceeds both operating costs and overhead.

Residual Income

The income that remains after deducting all required expenses and cost of capital from operating income.

Investment Centers

Segments within a company for which managers have responsibility over cost, revenue, and investment decisions.