1. HighLev Incorporated borrows heavily and uses the leverage to boost its return on equity to 30% this year, nearly 10% higher than the industry average. However, HighLev's stock price decreases relative to its industry counterparts. How is this possible?
a. Markets are inefficient and fail to recognize the benefits of leverage.
b. The increased debt resulted in interest payments that made HighLev's operating income drop even though return on equity increased.
c. Shareholders are not interested in return on equity.
d. the high levels of debt increased the riskiness of HighLev relative to its competitors.
2. To measure value, the concept of time value of money is used
a. to determine the interest rate paid on corporate debt.
b. to bring the future benefits and costs of a project, measured by its expected profits, back to the present.
c. to bring the future benefits and costs of a project, measured by its cash flows, back to the present.
d. to ensure that expected future profits exceed current profits today.