Which of the following is true regarding the UNLEVERAGED FIRM? O Firms use inter

Question

Which of the following is true regarding the UNLEVERAGED FIRM? O Firms use internally generated funds first, because there are no flotation costs or negative signals associated with such action O Firms issue debt ahead of stock because it has lower flotation costs O Firms issue stock ahead of debt because it has lower flotation costs O Unleveraged firms typically have a high degree of financial leverage and financial risk Managers and investors have the same information about the firm The sale of stock is always viewed as a positive signal None of the above

Explanation / Answer

Answer a) True statement is : Firm use internally generated fund first, because there are no flotation cost or negative signals associated with such action Answer b) Given that- DFL 1.3 DOL 2.2 Next year increase in sales 25% Current EBIT 50 Current net income 34 We know that DOL = % change in EBIT/%change in sales therefore, 2.2= % change in EBIT/25% % change in EBIT= 2.2*25% 55.0% Hence, 55% is correct answer Answer c) Given that- DFL 1.3 DOL 2.2 Next year increase in sales 25% Current EBIT 50 Current net income 34 We know that DFL = % change in net income/%change in EBIT % change in EBIT = 55% from previous answer therefore, 1.3= % change in net income/55% % change in net income= 1.3*55% 71.5% Hence, 71.5% is correct answer

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