One Would Prefer a Stock with Steadily Increasing Earnings Per

question 61

True/False

One would prefer a stock with steadily increasing earnings per share and return on equity.

---

Definitions:

Bankruptcy Risk

Bankruptcy risk refers to the likelihood that a company will be unable to meet its debt obligations and may be forced into bankruptcy.

Agency Costs

Expenses arising from the conflict of interest between a company's management or its shareholders and its creditors.

Financial Risk

The risk added by the use of debt financing. Debt financing increases the variability of earnings before taxes (but after interest); thus, along with business risk, it contributes to the uncertainty of net income and earnings per share. Business risk plus financial risk equals total corporate risk.

Market Risk

The possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets.