CBE 6 borrowing might lever up the return on common equity w

CBE 6. borrowing might lever up the return on common equity when: A) the cash from issuing debt is invested earm at a rate equal the borrowing cost B) the cash from issuing debt is invested eam at a rate greater than the borrowing C) the cash D) borrowing has no effect on the return on common equity 7. Which of the following statements is correct? of the debt cost of the debt cost of the debt from issuing debt is invested earn at a rate lower than the borrowing A. Net operating profit margin divided by net operating asset turnover equals return on net operating assets B. Return on net operating assets can be disaggregated into net operating profit margin and leverage C. Return on equity equals return on net operating assets less interest, net of tax D, Return on equity can be disaggregated into net operating profit margin, net operating asset turnover and leverage. 8. The residual income model defines stock price as book value plus the present value of residual income. What is the effect on stock price in a given period if the firm\'s cost of capital is greater than its return on equity? A. Cannot be determined B. No effect C. Stock price increases D. Stock price decreases 9. If a company is to successfully remain in business over the long haul, which of the following statements is most correct? Total cash flow from operations, measured over an extended period, must be greater than zero B. Total cash flow from investing, measured over an extended period, must be positive C. Total cash flow from financing, measured over an extended period, should be negative D. Total cash flow from financing plus total cash flow from investing, measured over an extended period, must be positive

Solution

6) Option B is correct.
Financial leverage generates a higher return for shareholders if firms earn more on its operating assets than its borrowing cost.
7) option D is correct.
ROE = Profit Margin x Asset Turnover Ratio x Equity multiplier
8) option D is correct.
Stock prices decreases when cost of capital is more than required rate of return on equity.
9)option A is correct
Cash flow from operating activities should be positive and greater than zero as it indicates revenue generating activities in the business.