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.

Aunt Dottie$$s Linen Inc. reported no long$-$term debt in its most recent balance sheet. A company with no debt on its books is referred to as:

A company with leverage, or a leveraged company

A company with no leverage, or an unleveraged company

Which of the following is true about the leveraging effect?

Under economic growth conditions, firms with relatively low leverage will have higher expected returns.

Under economic growth conditions, firms with relatively more leverage will have higher expected returns.

Blue Sky Drone Company has a total asset turnover ratio of $8\mathrm{.}50$x$,$ net annual sales of $$40$ million, and operating expenses of $$18$ million $($including depreciation and amortization$).$ On its balance sheet and income statement, respectively, it reported total debt of $$1\mathrm{.}75$ million on which it pays a $7\%$ interest rate.

To analyze a company$$s financial leverage situation, you need to measure the firm$$s debt management ratios. Based on the preceding information, what are the values for Blue Sky Drone$$s debt management ratios?

Ratio

Value

Debt ratio

Times$-$interest$-$earned ratio

The US tax structure influences a firm$$s willingness to finance with debt. The tax structure more debt.