Question
4. Debt (or leverage) management ratios Companies have the opportunity to use varying amounts of different sources of financing, including internal and external sources, to
4. Debt (or leverage) management ratios
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?
Company B
Company A
Which of the following is true about the leveraging effect?
Interest on debt can be deducted from pre-tax income, resulting in a greater taxable income and a smaller available operating income.
Interest on debt is a tax-deductible expense, which means that it can reduce a firms taxable income and tax obligation.
Red Snail Satellite Company has a total asset turnover ratio of 6.00x, net annual sales of $25 million, and operating expenses of $11 million (including depreciation and amortization). On its balance sheet and income statement, respectively, it reported total debt of $1.75 million on which it pays a 7% interest rate.
To analyze a companys financial leverage situation, you need to measure the firms debt management ratios. Based on the preceding information, what are the values for Red Snail Satellites debt management ratios?
Ratio | Value |
---|---|
Debt ratio | |
Times-interest-earned ratio |
The US tax structure influences a firms willingness to finance with debt. The tax structure more debt.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started