1. Company A uses long-term debt to finance its assets & Company B uses capital generated from shareholders to finance assets. Which company would be considered a financially leveraged firm, A or B?

2. Which of the following is true about the leveraging effect?

A. Using leverages reduces the potential of gains & losses

B. Usingleveragecangenerateshareholderwealth,butifacompanyfailstomakepaymentsonitsdebt,creditdefaultcanreduce shareholderwealth

3. Which of the following statements is TRUE about market ratios?

A. Companies with high research & development expenses tend to have LOW P/E ratios

B. Companies with high research & development expenses tend to have HIGH P/E ratios