Question

1A. A banker mainly uses financial statement ratio analysis to determine the company’s

a. ability to generate cash flows to service its debt.

b. fair value of assets pledged as collateral

c. ability to generate income to pay principal and interest amounts.

1B. Leverage refers to the increase in return on equity that a company can earn (over and above its return on assets) as a result of borrowing money from debt holders. As a company continues to borrow from debt holders,

a. it will be able to negotiate more favourable borrowing terms, thereby reducing the cost of financing.

b	the increased size of the company promotes stability and decreases risk.

c	the leverage effect will continually increase return on equity.

d	eventually the optimal capital structure will decrease the return on equity.

Answer 1

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1A. A banker mainly uses financial statement ratio analysis to determine the company’s

a. ability to generate cash flows to service its debt.

1B. Leverage refers to the increase in return on equity that a company can earn (over and above its return on assets) as a result of borrowing money from debt holders. As a company continues to borrow from debt holders,

d. eventually the optimal capital structure will decrease the return on equity.