Question

OK, so given your knowledge of the component ratios used in the DuPont equation, which of the following strategies should improve the company's ROE? (Check all that apply.)

a)Use more debt financing in its capital structure and increase the equity multiplier.
b)Increase the efficiency of its assets so that it generates more sales with each dollar of asset investment and increases the company's total asset turnover.
c)Increase the interest rate on its notes payable or long-term debt obligations because it will reduce the company's net profit margin.
d)Decrease the amount of debt financing used by the company, which will decrease the total asset turnover ratio.

Answer 1

When a small firm needs financial capital for expansion, it can choose to borrow or issue stock depending on ownership preferences, risk appetite, and financial goals.

Step-by-step explanation:

If a small firm needs a surge of financial capital to carry out a major expansion, it can choose to raise funds through borrowing or by issuing stock. The choice between borrowing and issuing stock depends on various factors such as the firm's current financial situation, long-term goals, and risk appetite.

If the firm prefers to retain full ownership and control, it may choose to borrow funds through bank loans or by issuing bonds. This allows the firm to maintain ownership and decision-making power while leveraging debt financing. On the other hand, if the firm is open to diluting ownership and allowing external investors to have a stake in the company, it can choose to issue stock. Issuing stock provides the opportunity to raise capital without incurring debt and grants investors a share in the firm's profits and voting rights.

In summary, the choice between borrowing and issuing stock depends on the firm's preferences for ownership, control, and risk, as well as its short-term and long-term financial goals.