Which of the following is/are helpful for evaluating the effect of leverage on a company's risk and potential returns?
I.Estimated pro forma coverage ratios
II.The recognition that financing decisions do not affect firm or shareholder value
III.A range of earnings chart and proximity of expected EBIT to the breakeven value
IV.A conservative debt policy that obviates the need to evaluate risk

Question

Quizplus · Accepted Answer

Estimated pro forma coverage ratios (I) and a range of earnings chart and proximity of expected EBIT to the breakeven value (III) are helpful for evaluating the effect of leverage on a company's risk and potential returns. The recognition that financing decisions do not affect firm or shareholder value (II) is incorrect as financing decisions can have an impact on a company's weighted average cost of capital and, in turn, its value. A conservative debt policy that obviates the need to evaluate risk (IV) is not a helpful tool for evaluating leverage risk and potential returns.

Which of the Following Is/are Helpful for Evaluating the Effect