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kherson [118]
3 years ago
7

Companies have the opportunity to use varying amounts of different sources of financing, including internal and external sources

, to acquire their assets, debt (borrowed) funds, and equity funds.
Company A uses long-term debt to finance its assets, and company B uses capital generated from shareholders to finance its assets. Which company would be considered a financially leveraged firm?
a. Company B
b. Company A

Which of the following is true about the leveraging effect?
a. Under economic growth conditions, firms with relatively more leverage will have higher expected returns.
b. Under economic growth conditions, firms with relatively low leverage will have higher expected returns.
Business
1 answer:
Mrrafil [7]3 years ago
5 0

Answer:

A) Company A is the one that is financially leveraged.

Where there is the presence of debt in the capital structure of a firm, that firm is said to be Financially leveraged.

B) A is true.

A company's return on equity or expected returns increases because the use of leverage increases stock volatility. Volatility increases its level of risk which in turn increases returns. This happens only if the company is operating an ideal level of financial leverage.

On the other hand, however, but excessive debt can increase the risk of default and can lead to low returns or even bankruptcy.

Cheers!

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Explanation:

Here's the complete question :

What is the present value of a four-year annuity of $100 per year that makes its first payment 2 years from today if the discount rate is 9%

Present value is the sum of discounted cash flows.

Present value can be calculated using a financial calculator

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To find the PV using a financial calacutor:

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2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

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