Which of the following statements is correct?
A)The use of debt in the capital structure results in tax benefits to the firm.
B)Debt is referred to as "financial leverage" because it magnifies returns to shareholders.
C)Debt management ratios evaluate whether a firm is financing its assets with a reasonable amount of debt versus equity financing.
D)All of these statements are correct.

Question

Quizplus · Accepted Answer

A) The use of debt in the capital structure results in tax benefits to the firm as the interest paid on debt is tax-deductible.
B) Debt is referred to as "financial leverage" because it magnifies returns to shareholders - this is because the cost of debt is lower than the cost of equity, and when a firm earns a higher return on its assets than the cost of debt, it results in higher returns to equity shareholders.
C) Debt management ratios evaluate whether a firm is financing its assets with a reasonable amount of debt versus equity financing - this helps in assessing the level of risk associated with a firm's capital structure. Both the debt and equity components of the capital structure play a critical role in determining a company's risk and profitability.

Which of the Following Statements Is Correct