Income Statement Question: FRA Question Bank
The following data are available for a company and its industry:
Company Common-Size Balance Sheet As of 31 December 2013
Cash and short-term investments
Total current assets
Net property, plant, and equipment (PP&E)
Other long-term assets
Liabilities and Shareholders’ Equity
Accrued liabilities and accounts payable
Total current liabilities
Other long-term liabilities
Total stockholders’ equity
Total liabilities and shareholders’ equity
Data for Comparison
Debt to equity
Long-term debt to equity
Which of the following statements about the company is most appropriate? The company:
- has more financial leverage than the industry.
- has made significant acquisitions in the past.
- is an electric utility.
I answered 1. but the answer is 2.
Isn’t financial leverage equal to Assets/Equity which for the company is 100/54 = 1.85 while for the industry it must be 1.5 i.e (we know D/E = 0.5 so D = 0.5E we also know A = D+E so A = 1.5E so A/E aka fin. leverage is 1.5)
Am I missing something?
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