Book- 12.2

Question 1

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

Answer 1

Both Outcomes and Important

Question 2

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

Answer 2

Acceptable Dollar Amount

Question 3

Net profits Divided by Total Owner’s Equity

Answer 3

Return on Equity

Question 4

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

Answer 4

Debt

Question 5

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.

Answer 5

As a General Rule

Question 6

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.

Answer 6

Debt is Risky

Question 7

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.

Answer 7

Equity

Question 8

Raising new capital through equity financing would mean:

Answer 8

Giving up Control to Outsiders

Question 9

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

Answer 9

Debt