Which of the following would cause a well-run company to become ...

[Sufayan.ah]

Which of the following would cause a well-run company to become highly leveraged?
 
  A) when the money that the company can earn investing the money that it borrows is equal to the cost of borrowing
  B) when the money that the company can earn investing the money that it borrows is significantly less than the cost of borrowing
  C) when the money that the company can earn investing the money that it borrows is significantly greater than the cost of borrowing
  D) when the money that the company can earn investing the money that it borrows is equal to more than half of the cost of borrowing

Question 2

When is the acid test an especially important test for a company's liquidity?
 
  A) when the economy is slow and inventory is not selling
  B) when the economy is robust and inventory is selling fast
  C) with companies that exclusively sell services and therefore do not have any inventory
  D) with companies that exclusively sell services to the wealthy and therefore are not subject to economic downturns

[cascooper22]

Answer to Question 1

Answer: C
Explanation: Borrowing heavily and becoming heavily leveraged makes sense for a company only when it can turn around and use the money it borrows to deliver a return that is significantly greater than its interest payments, percentage-wise. Thus, if a company can borrow at 5 percent and make 8 percent on the money it borrowsa 60 percent gainit is well worth it for the company to borrow heavily.

Answer to Question 2

Answer: A
Explanation: The acid test becomes especially important when the economy slows down and companies are stuck with inventory that can't be moved with the same speed that it was when the economy was healthy. By subtracting inventories from assets and comparing that difference to current liabilities, a manager gets a good picture of how much liquidity a company has.

[Sufayan.ah]

TY

[cascooper22]

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