Q1. Compute the values for (B) and (Y) in the above chart. Compute the Debt Ratio and record in the above chart. (Debt ratio = Liabilities / Assets) This ratio quantifies the proportion of assets financed with debt. (Google / _________) is financing assets primarily with debt; therefore, (Google / _________) is assuming the greater financial risk. Based only on the information presented above, which company would you choose as an investment? (_________ / GIS) Why?
Q2. For each item circle the correct response when comparing the issuance of debt and equity.
a. The corporation (_________ / does not) have to pay interest to creditors, but (does / does not) have to pay dividends to shareholders.
b. The corporation (_________ / never has to) repay amounts borrowed from creditors, but (must / _________) repay amounts invested by shareholders, thus the title, “contributed” capital.
c. The interest expense of debt (_________ / does not reduce) taxable income, but dividends paid to shareholders (reduce / _________) taxable income.
d. Issuing additional debt (does / _________) dilute current shareholders’ ownership, but issuing additional shares of common stock (_________ / does not) dilute current shareholders’ ownership.
e. If you were the CFO of a company, how would you recommend financing assets? Primarily with (_________ / _________). Why?