could you explain this:
comparing with the company that capitalizes cost,the company that expenses immediately will LEAST likely:
A earn lower ROA
B have lower financial leverage
C lower CFO
i think expensing has higher financial leverage since it has lower equity.
My understanding
Capitalising an asset Increases its value on Balance Sheet.
Expensing an asset lowers its value on Balance Sheet.
Financial Leverage = Asset/ Equity
while expensing an asset lowers the Asset and Equity. (Mathematically, subtacting the numerator and denominator by same no. results in lowers the fraction.) so, financial leverage will be lower when expensing.
And Answer of this Question is A earns lower ROA
Hope its Helpful
This isn’t necessarily true. For example:
\frac{5 - 1}{4 - 1} = \frac{4}{3} > \frac{5}{4}
Assuming that the numerator and denominator are both positive (as they should be for financial leverage), and that the amount you subtract is less than numerator and less than the denominator (as it should be for an expense vs. capitalize comparison), then if the fraction is greater than one (as it should be for financial leverage), subtracting the same amount from the numerator and the denominator will increase the fraction, not decrease it.
okay
Thanks for explaining