Question 1

The use of debt financing insures an increase in return on equity.

Accepted Answer

Debt financing can increase return on equity if the firm earns more on the borrowed funds than it pays in interest. However, it also increases financial risk, and if the cost of debt exceeds the returns generated by its use, it can decrease return on equity.

Question 2

Return on equity increases when the expected rate of return from the acquired assets is higher than the interest rate on the debt issued to finance the acquired assets.

Accepted Answer

Return on equity is calculated as net income divided by shareholders' equity. If the expected rate of return from the acquired assets is higher than the interest rate on the debt issued to finance the acquisition, the net income will increase, which will result in a higher return on equity.

Question 3

An advantage of bond financing is that issuing bonds does not affect owner control.

Accepted Answer

Bond financing involves borrowing money from investors, who become creditors of the company. Issuing bonds does not involve selling ownership in the company, so it does not affect owner control.

Question 4

Collateral from unsecured loans may be sold to offset the loan obligation if the loan is in default.

Accepted Answer

The answer of Collateral from unsecured loans may be sold...

Question 5

A company has assets of $350,000 and total liabilities of $200,000. Its debt-to-equity ratio is 0.6.
If total assets and total liabilities are $350,000 and $200,000, respectively, stockholders' equity must be $150,000. Thus, the debt-to-equity ratio is $200,000/$150,000 or 1.3.

Accepted Answer

The given debt-to-equity ratio calculation is incorrect. The correct calculation should be total liabilities/stockholders' equity, which is $200,000/$150,000, resulting in a debt-to-equity ratio of 1.33 (rounded to two decimal places).

Question 6

The present value of an annuity factor at 8% for 10 years is 6.7101. This implies that an annuity of ten $15,000 payments at 8% yields a present value of $2,235.
$15,000 x 6.7101 = $100,651.50

Accepted Answer

The present value of an annuity is calculated by multiplying the annuity payment by the present value annuity factor. The correct present value is $15,000 x 6.7101 = $100,651.50, not $2,235.

Question 7

A lessee has substantially all of the benefits and risks of ownership in an operating lease.

Accepted Answer

The answer of A lessee has substantially all of the...

Question 8

The present value of an annuity factor for 6 years at 10% is 4.3553. This implies that an annuity of six $2,000 payments at 10% would equal $8,710.60.
$2,000 x 4.3553 = $8,711

Accepted Answer

The calculation provided is correct and shows that the present value of six $2,000 payments at a 10% discount rate equals $8,710.60.

Question 9

A company's ability to issue unsecured debt depends on its credit standing.

Accepted Answer

A company's credit standing is a key factor in determining its ability to issue unsecured debt, as investors are more willing to lend money to companies with good credit ratings. Unsecured debt refers to loans or bonds that are not backed by collateral.

Question 10

The debt-to-equity ratio is calculated by dividing total stockholders' equity by total liabilities.

Accepted Answer

The debt-to-equity ratio is calculated by dividing total liabilities by total stockholders' equity.

Question 11

A company's debt-to-equity ratio was 1.0 at the end of Year 1. By the end of Year 2, it had increased to 1.7. Since the ratio increased from Year 1 to Year 2, the degree of risk in the firm's financing structure decreased during Year 2.

Accepted Answer

The statement is incorrect. An increase in debt-to-equity ratio indicates an increase in the degree of risk in the firm's financing structure.

Question 12

A bond is a written promise to pay an amount identified as the par value of the bond along with interest.

Accepted Answer

A bond is indeed a written promise to pay a specific amount (par value) along with interest.

Question 13

Interest payments on bonds are determined by multiplying the par value of the bond by the stated contract rate.

Accepted Answer

Interest payments on bonds are determined by multiplying the par value of the bond by the stated contract rate, which is also known as the coupon rate.

Question 14

A company with a low level of liabilities in relation to stockholders' equity is likely to have a very high debt-to-equity ratio.

Accepted Answer

A low level of liabilities in relation to stockholders' equity means that the company has a high level of equity in relation to debt. Therefore, a company with a low level of liabilities is likely to have a low debt-to-equity ratio.

Question 15

A lease is a contractual agreement between a lessor and a lessee that grants the lessee the right to use the asset for a period of time in return for cash payment(s) to the lessor.

Accepted Answer

This is the definition of a lease.

Question 16

Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation.

Accepted Answer

Bond interest is tax-deductible and considered an expense for the corporation, while dividends are not tax-deductible and are paid out of the corporation's after-tax profits, making them not an expense for the corporation.

Question 17

The debt-to-equity ratio enables financial statement users to assess the risk of a company's financing structure.

Accepted Answer

The debt-to-equity ratio compares a company's total debt to its shareholders' equity, allowing users to assess how much of a company's financing comes from debt versus equity. This helps to determine the company's risk level in terms of their ability to meet their debt obligations and handle potential financial challenges.

Question 18

The contract rate on previously issued bonds changes as the market rate of interest changes.

Accepted Answer

The answer of The contract rate on previously issued bonds...

Question 19

A pension plan is a contractual agreement between an employer and its employees in which the employer provides benefits to employees after they retire.

Accepted Answer

A pension plan is a contractual agreement between an employer and its employees in which the employer promises to provide retirement benefits to employees who participate in the plan.

Question 20

Operating leases are long-term or noncancelable leases in which the lessor transfers substantially all the risks and rewards of ownership to the lessee.

Accepted Answer

The answer of Operating leases are long-term or noncancelable leases...

Quiz 14: Long-Term Liabilities