Which of the following statement is wrong ? Financial flexibility is higher for

Question

Which of the following statement is wrong?

Financial flexibility is higher for firms with high operating ROA.

Higher leverage is associated with higher borrowing cost.

Preferred stock is a part of equity and should not be included in liabilities when calculating financial leverage.

The higher a firm’s positive spread between its operating ROA and net borrowing rate, the more benefit its common stockholders will derive from having capital structure leverage in the firm.

Financial flexibility is higher for firms with high operating ROA.

Higher leverage is associated with higher borrowing cost.

Preferred stock is a part of equity and should not be included in liabilities when calculating financial leverage.

The higher a firm’s positive spread between its operating ROA and net borrowing rate, the more benefit its common stockholders will derive from having capital structure leverage in the firm.

Explanation / Answer

Financial flexibility is defined as ability of a company to use debt financing for operation so for those companies whose Return on assets are high have generally higher financial Flexibility.

So Statement (A) is correct.

High leverage means company use more debt in operation. But if cost of debt is high then there is very less probability of use of high debt.

So Statement (B) is wrong.

Preferred stock is part of capital structure which has characteristics of both debt and equity. So in balance sheet prefer3eed stock is considered as part of equity and not as part of liability.

So Statement (C) is correct.

The higher a firm’s positive spread between its operating ROA and net borrowing rate, the more benefit its common stockholders will derive from having capital structure leverage in the firm.

So Statement (D) is correct.

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