The correct answer was C. Acquiring assets by issuing stock decreases the degree of financial leverage since total assets are increased but total liabilities remain the same. spot on CP…well done. next one coming after i see some posts on fin leverage
FML I need to read questions properly.
ROE Dupont = NI / CE = NI/NS * NS/TA * TA/CE I retract my earlier statement. Financial Leverage = TA/CE. not D/CE as written above.
"Acquiring assets by issuing stock decreases the degree of financial leverage since total assets are increased but total liabilities remain the same. " Does not make sense to me if we consider FL = A/E. Can somebody explain me like a baby.
yeah and how did you still get the right answer (verbatim) when you thought the numerator was something else?
S1: Incorrect S2: Correct C?
one sec swap. ill put it back up in a sec
This is how I got to C (and I considered FL = D/E) CS up -> E up D = same FL = D/E = Down
so i guess for this question they mean d/e for financial leverage which is completely different that Financial Leverage in DuPont model?
I think so - unless cpk has a trick to prove it otherwise.
ok ok i get it. if they dont buy assets by taking out a loan or issuing debt, their assets will rise. they get the money for buying the asset from issuing common stock/equity. so the assets rise by the $ amount of the asset and liabilities remains the same. Michael Fullen is discussing the evaluation of capital budgeting projects with his coworker, Katina Katzenmoyer. During conversation, Katzenmoyer makes the following statements regarding the determination of real option values: Statement 1: For independent projects, an analyst must determine a value for the real option that is separate from the project regardless of the profitability of the project. Statement 2: Abandonment options can be valuable, but should only be exercised when the abandonment value is greater than the discounted present value of the remaining cash flows of the project. Are the statements made by Katzenmoyer correct? A) Both are correct. B) Both are incorrect. C) Only one is correct.
S1: Incorrect S2: Correct C?
I have seen both forms used TA/CE and D/E as well…
1 is definitely wrong. 2 feels ok to me. i’ll go C.
C:- Real option always add value. No need to determine its value.
c is the correct answer… heres a nice follow up (or is it?) Financial leverage would NOT be increased if a firm financed its next project with: A) common stock. B) preferred stock. C) bonds with embedded call options.
A) again. Preferred stock as well as Bonds with embedded calls - are increasing Debt. So FL goes up with those. Should qualify - in most circles - Preferred stock is considered debt.
A
A?
wow… B? Not sure…a simple guess