Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

Which of the following best explains why debt financing can increase the return to stockholders?

Debt reduces the company's total assets, which increases earnings per share.

Debt allows a company to use leverage, potentially increasing returns to stockholders if the return on assets exceeds the cost of debt.

Debt eliminates the need to pay dividends to stockholders.

Debt guarantees higher profits regardless of company performance.

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Verified step by step guidance

Understand the concept of debt financing: Debt financing involves borrowing funds to finance business operations or investments. It creates an obligation to repay the borrowed amount along with interest.

Learn about leverage: Leverage refers to the use of borrowed funds to increase the potential return on investment. When a company uses debt financing, it can amplify returns to stockholders if the return on assets (ROA) exceeds the cost of debt.

Analyze the relationship between ROA and cost of debt: If the company earns a higher return on its assets than the interest it pays on its debt, the excess return benefits stockholders, increasing their return on equity (ROE).

Understand the impact on earnings per share (EPS): Debt financing does not directly reduce total assets but can increase EPS by reducing the number of shares outstanding (if debt is used instead of issuing equity) and by leveraging higher returns.

Evaluate the incorrect options: Debt does not eliminate the need to pay dividends, nor does it guarantee higher profits regardless of performance. The correct explanation is that debt allows a company to use leverage, potentially increasing returns to stockholders if ROA exceeds the cost of debt.