Book- 12.2 Flashcards Preview

Management > Book- 12.2 > Flashcards

Flashcards in Book- 12.2 Deck (9)
Loading flashcards...
1
Q

Dollar profits and the percentage return earned on investment in the business.

A

Both Outcomes and Important

2
Q

Cannot be determined independent of the size of the business owner’s investment in the business.

A

Acceptable Dollar Amount

3
Q

Net profits Divided by Total Owner’s Equity

A

Return on Equity

4
Q

The return on equity is higher if half of the firm’s financing comes from equity and half from _____.

A

Debt

5
Q

As long as a firm’s rate of return on assets (operating profits divided by total assets) is greater than the cost of the debt (interest rate), the owner’s rate of return on equity will increase as the firm uses more debt.

A

As a General Rule

6
Q

If the firm fails to earn profits, creditors still insist on being repaid, regardless of the firm’s actual performance. In extreme cases, creditors can force firms into bankruptcy if they fail to honor their financial obligations.

A

Debt is Risky

7
Q

Less demanding. If a firm is not profitable, an equity investor must accept the disappointing results and hope for better results next year. Equity investors cannot demand more than what is earned.

A

Equity

8
Q

Raising new capital through equity financing would mean:

A

Giving up Control to Outsiders

9
Q

Increases risk, but also permits them to retain full ownership of the firm.

A

Debt