Increased leverage allows companies to control more assets and increase their ROE. What’s bad about leverage?
It reduces productivity, which can decrease overall
ROE.
Leverage-based profits are not cash-based and are ignored by finance.
Leverage multiplies losses, too, as it increases a company’s risk
There is nothing bad about leverage using other people’s money is a good way to increase the value of the company.
What types of companies are more likely to have high leverage?
Companies with high growth opportunities in new industries
Companies in stable, predictable industries with reliable cash flows
Technology companies
Companies with low profitability
In 2009, Warren Buffett invested $3 billion in Dow Chemical, via an issuance of preferred stock.
Which of the following is not an advantage of preferred stock to the owner of the preferred stock?
In the case of bankruptcy, preferred stockholders get paid before common stockholders.
Even when common stockholders get no dividends, preferred stockholders may get dividends.
Preferred stock is associated with ownership in the company, unlike debt.
Preferred stock dividends must be in even numbered percentages (2 percent, 4 percent, etc.).
Which of the following is least likely to be listed as an asset on a balance sheet?
Gilead Sciences Inc.’s patent for the highly profitable hepatitis C treatment it developed in-house
Google’s corporate headquarters
Payments owed to Ford Motor Company by dealer ships for the purchase of cars
The $42 billion in Facebook’s bank accounts at year-end 2017
Which of the following companies is most likely to have the highest inventory turnover?
Subway, a fast-food restaurant company
Books-A-Million, a bookstore chain
Whole Foods, a grocery store
British Airways, an airline
Which ratio is a distinguishing feature of retail companies?
High ROE
Low receivables collection period
High inventory turnover
High total debt/total assets
BHP Billiton is one of the world’s largest mining companies, and accounts receivable make up 21 percent of its total assets (in 2016).
Which of the following companies is most likely to owe BHP Billiton money as part of BHP Billiton’s accounts receivable?
Bank of America, a global bank Mining Recruitment Agency, a recruiter for employees specialized in mining Sysco, a food distributor United States Steel Corporation, a steel manufacturer
Which of the following constituencies care most about a company’s current ratio?
Its stockholders
Its suppliers
Its competitors
Its customers
True or false: a high ROE is always a good thing.
True
False
Home Depot, a home improvement supply store, issued $2 billion in debt in late 2016. What is the main difference between debt and other liabilities,like accounts payable?
Debt carries an explicit interest rate.
Debt represents ownership in the company.
Debt is a residual claim.
Debt is only owed to suppliers