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Evaluate the following statements as TRUE or FALSE 1. Increase in current asset and a decrease...

Evaluate the following statements as TRUE or FALSE

1. Increase in current asset and a decrease in current Liabilities represents external flow cash. ( )

2. Debt financing has a negative effect on the shareholders profit maximization. ( )

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Answer #1

Answer :

1. FALSE

Explanation : An external cash flow is a investment that is incurred in or exits a portfolio. The cash flow may be defined at a single point of time by the firm as a single flow or an aggregate of a number of flows .

2. TRUE

Explanation : With the increase of amount of debt capital relative to its equity capital, a company can increase its return on equity. The use of debt may increase the Return on Equity funds, but it increases risk as well.

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