What are three important implications of financial leverage?
How does the use of financial leverage affect stockholders’ control
position?
How does the U.S. tax structure influence a firm’s willingness to
finance with debt?
How does the decision to use debt involve a risk-versus-return
trade-off?
Explain the following statement: “Analysts look at both balance
sheet and income statement ratios when appraising a firm’s finan-
cial condition.”
Name three ratios that are used to measure financial leverage, and
write out their equations.
A company has EBITDA of $500 million, interest payments of $50
million, lease payments of $40 million, and required principal
payments (due this year) of $30 million. What is its EBITDA cover-
age ratio? (4.5
