In: Business and Management

Submitted By jjevens
Words 481
Pages 2
I believe that reason financial managers base their investment decisions based off of the current assets and current liabilities is because they need to see the financial position that the company is in before they choose to invest their money. If a company has a large amount of current liabilities in comparison to their current assets, this means they have more money they owe than they own. The current assets give value to the companys bottom line and the current liabilities take away from the companys bottom line. Current asset and liability balances can be viewed as a result of an investment decision because if the current assets are less than its liabilities, the company may have a negative net worth (Block, Hirt, & Danielson, 2010). The degree of operating leverage or DOL is defined as the percentage change in the operating income that occurs as a result of a percentage change in the units sold (Block, Hirt, & Danielson, 2010). When a company is highly leveraged, they will have an increase in income as their volume expands. When the DOL is computed close to the break-even point it will result in a higher number because of the increase in the operating income (Block, Hirt, & Danielson, 2010). There are leveraged firms and conservative firms. The DOL for a leveraged firm is higher than of a conservative firm. This means that in this example, the Hi Tech Manufacturing Company would be considered to be more leveraged than that the Old School. Financial leverage is the amount of debt used in the capital structure of the firm (Block, Hirt, & Danielson, 2010). The text pointed out that it is helpful to remember that the operating leverage primarily affects the left-hand side of the balance sheet and the financial leverage primarily affects the right-hand side of the balance sheet. The degree of financial leverage or DFL is defined as the percentage…...

Similar Documents

Fiacial Accounting

...QUIZ 1 QUESTIONS |[pic] | | 1. What is a rights issue? (1 Mark) A rights issue is an issue of shares with the terms of the issue giving existing shareholders the right to an additional number of shares in proportion to their existing shareholding. 2. Distinguish between a renounceable and non-renounceable rights issue? (1 Mark) Renounceable: existing shareholders can sell all or part of their rights to new shares to another party. This is not available in the case of non-renounceable rights issue. 3. What is a private placement of shares? (1 Marks) A private placement is where a company places the shares with specific investors rather than invite applications for the new issue of shares. 4. Name two reasons why a company could make an appropriation of its retained earnings? (1 Mark) Appropriations from retained earnings are made for a) dividends, cash or shares; b) transfer to other reserves. 5. The equity of Master Shipping Ltd on 30 June 2009 consisted of: 280,000 ordinary shares, issued at $2.40 each, called to $2.40 $672,000 Calls in arrears (24,000 shares x 80c) ($19,200) The directors forfeited the shares on which the call was outstanding. The company’s constitution provides that forfeited shares cannot be reissued and that the balance of any forfeited amounts, net of reissue costs, must be refunded to the former shareholders. Refund cheques were sent to shareholders. Prepare journal entries...

Words: 1229 - Pages: 5