Question 1

increase in the debt ratio will generally have no effect on which of these items?

Accepted Answer

A) Business risk. 
B) Total risk. 
C) Financial risk. 
D) Market risk. 
E) The firm's beta. 
A) Business risk. 
B) Total risk. 
C) Financial risk. 
D) Market risk. 
E) The firm's beta.

Question 2

Companies HD and LD have the same total assets, operating income Which of the following statements is CORRECT?

Accepted Answer

A) HD should have a higher return on assets (RO
A)  than LD. 
B) HD should have a higher times interest earned (TI
E)  ratio than LD. 
C) HD should have a higher return on equity (RO
E)  than LD, but its risk, as measured by the standard deviation of ROE, should also be higher than LD's. 
D) Given that BEP > rd, HD's stock price must exceed that of LD. 
E) Given that BEP > rd, LD's stock price must exceed that of HD. 
A) HD should have a higher return on assets (RO
A)  than LD. 
B) HD should have a higher times interest earned (TI
E)  ratio than LD. 
C) HD should have a higher return on equity (RO
E)  than LD, but its risk, as measured by the standard deviation of ROE, should also be higher than LD's. 
D) Given that BEP > rd, HD's stock price must exceed that of LD. 
E) Given that BEP > rd, LD's stock price must exceed that of HD.

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A) In general, a firm with low operating leverage also has a small proportion of its total costs in the form of fixed costs. 
B) There is no reason to think that changes in the personal tax rate would affect firms' capital structure decisions. 
C) A firm with high business risk is more likely to increase its use of financial leverage than a firm with low business risk, assuming all else equal. 
D) If a firm's after-tax cost of equity exceeds its after-tax cost of debt, it can always reduce its WACC by increasing its use of debt. 
E) Suppose a firm has less than its optimal amount of debt.Increasing its use of debt to the point where it is at its optimal capital structure will decrease the costs of both debt and equity financing. 
A) In general, a firm with low operating leverage also has a small proportion of its total costs in the form of fixed costs. 
B) There is no reason to think that changes in the personal tax rate would affect firms' capital structure decisions. 
C) A firm with high business risk is more likely to increase its use of financial leverage than a firm with low business risk, assuming all else equal. 
D) If a firm's after-tax cost of equity exceeds its after-tax cost of debt, it can always reduce its WACC by increasing its use of debt. 
E) Suppose a firm has less than its optimal amount of debt.Increasing its use of debt to the point where it is at its optimal capital structure will decrease the costs of both debt and equity financing.

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A) When a company increases its debt ratio, the costs of equity and debt both increase.Therefore, the WACC must also increase. 
B) The capital structure that maximizes the stock price is generally the capital structure that also maximizes earnings per share. 
C) All else equal, an increase in the corporate tax rate would tend to encourage a company to increase its debt ratio. 
D) Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its WACC. 
E) Since debt is cheaper than equity, increasing a company's debt ratio will always reduce its WACC. 
A) When a company increases its debt ratio, the costs of equity and debt both increase.Therefore, the WACC must also increase. 
B) The capital structure that maximizes the stock price is generally the capital structure that also maximizes earnings per share. 
C) All else equal, an increase in the corporate tax rate would tend to encourage a company to increase its debt ratio. 
D) Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its WACC. 
E) Since debt is cheaper than equity, increasing a company's debt ratio will always reduce its WACC.

Question 5

group of venture investors is considering putting money into Lemma Books, which wants to produce a new reader for electronic books.The variable cost per unit is estimated at $250, the sales price would be set at twice the VC/unit, fixed costs are estimated at $750,000, and the investors will put up the funds if the project is likely to have an operating income of $500,000 or more.What sales volume would be required in order to meet this profit goal?

Accepted Answer

A) 4,513 
B) 4,750 
C) 5,000 
D) 5,250 
E) 5,513 
A) 4,513 
B) 4,750 
C) 5,000 
D) 5,250 
E) 5,513

Question 6

DeLong Inc.has fixed operating costs of $470,000, variable costs of $2.80 per unit produced, and its products sell for $4.00 per unit.What is the company's breakeven point, i.e., at what unit sales volume would income equal costs?

Accepted Answer

A) 391,667 
B) 411,250 
C) 431,813 
D) 453,403 
E) 476,073 
A) 391,667 
B) 411,250 
C) 431,813 
D) 453,403 
E) 476,073

Question 7

Aaron Athletics is trying to determine its optimal capital structure.The company's capital structure consists of debt and common stock.In order to estimate the cost of debt, the company has produced the following table: The company uses the CAPM to estimate its cost of common equity, rs.The risk-free rate is 5% and the market risk premium is 6%.Aaron estimates that if it had no debt its beta would be 1.0.(Its "unlevered beta," bU, equals 1.0.)On the basis of this information, what is the company's optimal capital structure, and what is the firm's cost of capital at this optimal capital structure?

Accepted Answer

A) wc = 0.9; wd = 0.1; WACC = 14.96% 
B) wc = 0.8; wd = 0.2; WACC = 10.96% 
C) wc = 0.7; wd = 0.3; WACC = 7.83% 
D) wc = 0.6; wd = 0.4; WACC = 10.15% 
E) wc = 0.5; wd = 0.5; WACC = 10.18% 
A) wc = 0.9; wd = 0.1; WACC = 14.96% 
B) wc = 0.8; wd = 0.2; WACC = 10.96% 
C) wc = 0.7; wd = 0.3; WACC = 7.83% 
D) wc = 0.6; wd = 0.4; WACC = 10.15% 
E) wc = 0.5; wd = 0.5; WACC = 10.18%

Question 8

Business risk is affected by a firm's operations.Which of the following is NOT associated with (or does not contribute to) business risk?

Accepted Answer

A) Demand variability. 
B) Sales price variability. 
C) The extent to which operating costs are fixed. 
D) The extent to which interest rates on the firm's debt fluctuate. 
E) Input price variability. 
A) Demand variability. 
B) Sales price variability. 
C) The extent to which operating costs are fixed. 
D) The extent to which interest rates on the firm's debt fluctuate. 
E) Input price variability.

Question 9

Firms HD and LD are identical except for their level of debt and the interest rates they pay on debt--HD has more debt and pays a higher interest rate on that debt.Based on the data given below, what is the difference between the two firms' ROEs?
$$\begin{array} { | c | c | c | } 
\hline & \text { Firm HD } & \text { Firm LD } \
\hline \text { Assets } & 200 & 200 \
\hline \text { Debt } & 100 & 60 \
\hline \text { Equity } & 100 & 140 \
\hline & & \
\hline \text { EBIT } & 40 & 40 \
\hline \text { Interest } & 12 & 6 \
\hline \text { EBT } & 28 & 34 \
\hline \text { Taxes } & 7 & 8.5 \
\hline \text { Net income } & 21 & 25.5 \
\hline \text { ROE } & 21.00 \% & 18.21 \% \
\hline
\end{array}$$

Accepted Answer

A) 2.18% 
B) 2.29% 
C) 2.41% 
D) 2.54% 
E) 2.66% 
A) 2.18% 
B) 2.29% 
C) 2.41% 
D) 2.54% 
E) 2.66%

Question 10

Elephant Books sells paperback books for $7 each.The variable cost per book is $5.At current annual sales of 200,000 books, the publisher is just breaking even.It is estimated that if the authors' royalties are reduced, the variable cost per book will drop by $1.Assume authors' royalties are reduced and sales remain constant; how much more money can the publisher put into advertising (a fixed cost) and still break even?

Accepted Answer

A) $600,000 
B) $466,667 
C) $333,333 
D) $200,000 
E) None of the above 
A) $600,000 
B) $466,667 
C) $333,333 
D) $200,000 
E) None of the above

Question 11

Dabney Electronics currently has no debt.Its operating income is $20 million and its tax rate is 40%.It pays out all of its net income as dividends and has a zero growth rate.The current stock price is $40 per share, and it has 2.5 million shares of stock outstanding.If it moves to a capital structure that has 40% debt and 60% equity (based on market values), its investment bankers believe its weighted average cost of capital would be 10%.What would its stock price be if it changes to the new capital structure?

Accepted Answer

A) $40 
B) $48 
C) $52 
D) $54 
E) $60 
A) $40 
B) $48 
C) $52 
D) $54 
E) $60

increase in the debt ratio will generally have no effect on which of these items?

Companies HD and LD have the same total assets, operating income Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

DeLong Inc.has fixed operating costs of $470,000, variable costs of $2.80 per unit produced, and its products sell for $4.00 per unit.What is the company's breakeven point, i.e., at what unit sales volume would income equal costs?

Business risk is affected by a firm's operations.Which of the following is NOT associated with (or does not contribute to) business risk?

Overview

Statements, CF, Taxes

Financial Analysis

Time Value of Money

Bonds

Risk and Return

Stocks

Financial Options

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Forecasting

Valuation, Governanc

Dividends

Working Capital

Multinational

Filters

Exam 15: CAP Structure

increase in the debt ratio will generally have no effect on which of these items?

Companies HD and LD have the same total assets, operating income Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

DeLong Inc.has fixed operating costs of $470,000, variable costs of $2.80 per unit produced, and its products sell for $4.00 per unit.What is the company's breakeven point, i.e., at what unit sales volume would income equal costs?

Business risk is affected by a firm's operations.Which of the following is NOT associated with (or does not contribute to) business risk?

Overview

Statements, CF, Taxes

Financial Analysis

Time Value of Money

Bonds

Risk and Return

Stocks

Financial Options

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Forecasting

Valuation, Governanc

Dividends

Working Capital

Multinational

Filters