"Equity Investments":The company's financial leverage ratio

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来源: 正保会计网校编辑：小鞠橘桔 2021/01/05 10:27:31　字体：大小

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Questions 1:

Which of the following transactions is most likely to affect a company’s financial leverage ratio?

A、 Payment of a 9% stock dividend

B、 An increase in cash dividends paid

C 、Completion of a previously announced 1-for-20 reverse stock split

Questions 2:

The Gordon growth model is most appropriate for valuing the common stock of a dividend paying company that is:

A 、mature and relatively insensitive to economic fluctuations.

B、 young and just entering the growth phase.

C、 experiencing growth that is higher than the sustainable growth rate.

View answer resolution

【Answer to question 1】B

【analysis】

B is correct. Cash dividends affect a company’s capital structure and financial leverage ratios by reducing assets and shareholders’ equity.

A is incorrect. Neither stock splits nor stock dividends affect a firm’s financial leverage ratio.

C is incorrect. Neither stock splits nor stock dividends affect a firm’s financial leverage ratio.

【Answer to question 2】A

【analysis】

A is correct. The Gordon growth model is most appropriate for valuing common stock of a dividend paying company that is mature and relatively insensitive to the business cycle or economic fluctuations.

B is incorrect. A three-stage dividend discount model would be most appropriate for a fairly young company that is just entering the growth phase.

C is incorrect. A two-stage dividend discount model would be appropriate for a company that is experiencing a higher than the sustainable growth rate.

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