Companies use different sources for financing their assets-internal resources as

Question

Companies use different sources for financing their assets-internal resources as v/el' as external resources, and debt (borrowed) as well as equity funds. Aunt Dottie's Linen In reported no long-term debt in its most recent balance sheet. A company with no debt on its books is referred to as: A company with leverage, or a leveraged company A company with no leverage, or an unleveraged company Which of the following Is true about the leveraging effect? Using leverage reduces the potential of gains and losses. Using leverage can generate shareholder wealth, but it a company fails to make payments on its debt, credit default can reduce shareholder wealth. Influenced by a firm's ability to make interest payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with times-interest-earned ratios (TIE).

Explanation / Answer

1. A company with no debt on its books is referred to as a compny with no leverage, or an unlevered company.

2. This is true about leveraging effect : Using leverage can generate shareholders wealth, but if a company fails to make payments on its debt, credit default can reduce shareholder wealth.

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