Question 1

Fixed financial charges include

Accepted Answer

A)  stock repurchase expense. 
B)  bond interest expense and preferred stock dividends. 
C)  common stock dividends and bond interest expense. 
D)  common stock dividends and preferred stock dividends. 
A)  stock repurchase expense. 
B)  bond interest expense and preferred stock dividends. 
C)  common stock dividends and bond interest expense. 
D)  common stock dividends and preferred stock dividends.

Question 2

The cost of equity is greater than the cost of debt and increases with increasing financial leverage, but generally less rapidly than the cost of debt.

Accepted Answer

A) True 
 B)False

Question 3

The cost of debt financing results from

Accepted Answer

A)  the agency costs of the lender's monitoring and controlling the firm's actions. 
B)  the costs associated with managers having more information about the firm's prospects than do investors. 
C)  the increased profitability of bankruptcy caused by debt obligations. 
D)  all of the above. 
A)  the agency costs of the lender's monitoring and controlling the firm's actions. 
B)  the costs associated with managers having more information about the firm's prospects than do investors. 
C)  the increased profitability of bankruptcy caused by debt obligations. 
D)  all of the above.

Question 4

A firm has fixed operating costs of $525,000, of which $125,000 is depreciation expense. The firm's sales price per unit is $35 and its variable cost per unit is $22.50. The firm's cash operatingbreak-even point in units is ____________.

Accepted Answer

A)  23,330 
B)  42,000 
C)  32,000 
D)  52,000 
A)  23,330 
B)  42,000 
C)  32,000 
D)  52,000

Question 5

The three basic types of leverage are:

Accepted Answer

A)  operating, production, and financial. 
B)  operating, financial, and total. 
C)  operating, production, and total. 
D)  production, financial, and total. 
A)  operating, production, and financial. 
B)  operating, financial, and total. 
C)  operating, production, and total. 
D)  production, financial, and total.

Question 6

Comparison of the degree of operating leverage of two firms is valid only when the base level of sales used for each firm is the same.

Accepted Answer

A) True 
 B)False

Question 7

Due to its secondary position relative to equity, suppliers of debt capital take greater risk and therefore must be compensated with higher expected returns than suppliers of equity capital.

Accepted Answer

A) True 
 B)False

Question 8

Financial leverage is concerned with the relationship between the firm's earnings after interest and taxes and its common stock earnings per share.

Accepted Answer

A) True 
 B)False

Question 9

Canadian and U.S. companies have _________debt ratios given the _________between the two countries.

Accepted Answer

A)  uniquely different; high degree of integration 
B)  similar; high degree of integration 
C)  similar; low degree of integration 
D)  uniquely different; low degree of integration 
A)  uniquely different; high degree of integration 
B)  similar; high degree of integration 
C)  similar; low degree of integration 
D)  uniquely different; low degree of integration

Question 10

Debt capital has a lower risk because the lenders have far stronger legal pressure against the company to make payment than do preferred or common stockholders.

Accepted Answer

A) True 
 B)False

Question 11

Whenever the percentage change in earnings per share (EPS) resulting from a given percentage change in sales is greater than the percentage change in sales, financial leverage exists.

Accepted Answer

A) True 
 B)False

Question 12

The levels of fixed-cost assets and funds that management selects affect the variability of returns.

Accepted Answer

A) True 
 B)False

Question 13

Total leverage exists whenever the percentage change in earnings per share (EPS) resulting from a given percentage change in sales is greater than the percentage change in sales.

Accepted Answer

A) True 
 B)False

Question 14

In the EBIT-EPS approach to capital structure, a constant level of EBIT is assumed

Accepted Answer

A)  to emphasize the relationship between interest expenses and taxes. 
B)  to ease the calculations of owners' equity. 
C)  to isolate the impact on returns of the financing costs associated with alternative capital structures. 
D)  to concentrate on the effect of revenue and expense on capital structure decisions. 
A)  to emphasize the relationship between interest expenses and taxes. 
B)  to ease the calculations of owners' equity. 
C)  to isolate the impact on returns of the financing costs associated with alternative capital structures. 
D)  to concentrate on the effect of revenue and expense on capital structure decisions.

Question 15

In 1999, the overall debt ratio for all Canadian industries is_________percent which is the result of_________companies being included.

Accepted Answer

A)  74.9%; manufacturing 
B)  12.1%; wholesaling 
C)  74.9%; financial 
D)  12.1%; retailing 
A)  74.9%; manufacturing 
B)  12.1%; wholesaling 
C)  74.9%; financial 
D)  12.1%; retailing

Question 16

The firm's__________ is the level of sales necessary to cover all operating costs, i.e., the point at which EBIT = $0.

Accepted Answer

A)  total break-even point 
B)  cash break-even point 
C)  financial break-even point 
D)  operating break-even point 
A)  total break-even point 
B)  cash break-even point 
C)  financial break-even point 
D)  operating break-even point

Question 17

When a firm has fixed operating costs, operating leverage is present. In that case, an increase in sales results in a more-than-proportional increase in EBIT, and a decrease in sales results in a more-than-proportional decrease in EBIT.

Accepted Answer

A) True 
 B)False

Question 18

With increasing costs, especially fixed operating and financial cost-comes increasing risk, since thefirm will have to achieve a higher level of sales just to break even.

Accepted Answer

A) True 
 B)False

Question 19

Operating and financial constraints placed on a corporation by loan provisions are

Accepted Answer

A)  agency costs to the firm. 
B)  necessary to control the risk of the firm. 
C)  agency costs to the lender. 
D)  interest rate costs to the firm. 
A)  agency costs to the firm. 
B)  necessary to control the risk of the firm. 
C)  agency costs to the lender. 
D)  interest rate costs to the firm.

Question 20

One of the limitations of break-even analysis is its short-term time horizon. A large outlay in the current financial period could significantly raise the firm's break-even point, while the benefits may occur over a period of years.

Accepted Answer

A) True 
 B)False

Fixed financial charges include

The cost of equity is greater than the cost of debt and increases with increasing financial leverage, but generally less rapidly than the cost of debt.

The cost of debt financing results from

A firm has fixed operating costs of $525,000, of which $125,000 is depreciation expense. The firm's sales price per unit is $35 and its variable cost per unit is $22.50. The firm's cash operatingbreak-even point in units is ____________.

The three basic types of leverage are:

Comparison of the degree of operating leverage of two firms is valid only when the base level of sales used for each firm is the same.

Due to its secondary position relative to equity, suppliers of debt capital take greater risk and therefore must be compensated with higher expected returns than suppliers of equity capital.

Financial leverage is concerned with the relationship between the firm's earnings after interest and taxes and its common stock earnings per share.

Canadian and U.S. companies have _debt ratios given the _between the two countries.

Debt capital has a lower risk because the lenders have far stronger legal pressure against the company to make payment than do preferred or common stockholders.

Whenever the percentage change in earnings per share (EPS) resulting from a given percentage change in sales is greater than the percentage change in sales, financial leverage exists.

The levels of fixed-cost assets and funds that management selects affect the variability of returns.

Total leverage exists whenever the percentage change in earnings per share (EPS) resulting from a given percentage change in sales is greater than the percentage change in sales.

In the EBIT-EPS approach to capital structure, a constant level of EBIT is assumed

In 1999, the overall debt ratio for all Canadian industries is_percent which is the result of_companies being included.

The firm's__________ is the level of sales necessary to cover all operating costs, i.e., the point at which EBIT = $0.

When a firm has fixed operating costs, operating leverage is present. In that case, an increase in sales results in a more-than-proportional increase in EBIT, and a decrease in sales results in a more-than-proportional decrease in EBIT.

With increasing costs, especially fixed operating and financial cost-comes increasing risk, since thefirm will have to achieve a higher level of sales just to break even.

Operating and financial constraints placed on a corporation by loan provisions are

One of the limitations of break-even analysis is its short-term time horizon. A large outlay in the current financial period could significantly raise the firm's break-even point, while the benefits may occur over a period of years.

Overview of Corporate Finance

Financial Statements, Cash Flows, and Taxes

Financial Statement Analysis

Financial Planning and Forecasting

Financial Markets, Institutions, and Securities

Time Value of Money

Risk and Return

Valuation of Financial Securities

The Cost of Capital

Dividend Policy

Capital Budgeting: Principles and Techniques

Dealing With Project Risk and Other Topics in Capital Budgeting

Working Capital and Management of Current Assets

Management of Current Liabilities

Lease Financing: Concepts and Techniques

Corporate Securities, Derivatives, and Swaps

Mergers and Acquisitions, and Business Failure

International Corporate Finance

Filters

Exam 10: Leverage and Capital Structure

Fixed financial charges include

The cost of equity is greater than the cost of debt and increases with increasing financial leverage, but generally less rapidly than the cost of debt.

The cost of debt financing results from

A firm has fixed operating costs of $525,000, of which $125,000 is depreciation expense. The firm's sales price per unit is $35 and its variable cost per unit is $22.50. The firm's cash operatingbreak-even point in units is ____________.

The three basic types of leverage are:

Comparison of the degree of operating leverage of two firms is valid only when the base level of sales used for each firm is the same.

Due to its secondary position relative to equity, suppliers of debt capital take greater risk and therefore must be compensated with higher expected returns than suppliers of equity capital.

Financial leverage is concerned with the relationship between the firm's earnings after interest and taxes and its common stock earnings per share.

Canadian and U.S. companies have _________debt ratios given the _________between the two countries.

Debt capital has a lower risk because the lenders have far stronger legal pressure against the company to make payment than do preferred or common stockholders.

Whenever the percentage change in earnings per share (EPS) resulting from a given percentage change in sales is greater than the percentage change in sales, financial leverage exists.

The levels of fixed-cost assets and funds that management selects affect the variability of returns.

Total leverage exists whenever the percentage change in earnings per share (EPS) resulting from a given percentage change in sales is greater than the percentage change in sales.

In the EBIT-EPS approach to capital structure, a constant level of EBIT is assumed

In 1999, the overall debt ratio for all Canadian industries is_________percent which is the result of_________companies being included.

The firm's__________ is the level of sales necessary to cover all operating costs, i.e., the point at which EBIT = $0.

When a firm has fixed operating costs, operating leverage is present. In that case, an increase in sales results in a more-than-proportional increase in EBIT, and a decrease in sales results in a more-than-proportional decrease in EBIT.

With increasing costs, especially fixed operating and financial cost-comes increasing risk, since thefirm will have to achieve a higher level of sales just to break even.

Operating and financial constraints placed on a corporation by loan provisions are

One of the limitations of break-even analysis is its short-term time horizon. A large outlay in the current financial period could significantly raise the firm's break-even point, while the benefits may occur over a period of years.

Overview of Corporate Finance

Financial Statements, Cash Flows, and Taxes

Financial Statement Analysis

Financial Planning and Forecasting

Financial Markets, Institutions, and Securities

Time Value of Money

Risk and Return

Valuation of Financial Securities

The Cost of Capital

Dividend Policy

Capital Budgeting: Principles and Techniques

Dealing With Project Risk and Other Topics in Capital Budgeting

Working Capital and Management of Current Assets

Management of Current Liabilities

Lease Financing: Concepts and Techniques

Corporate Securities, Derivatives, and Swaps

Mergers and Acquisitions, and Business Failure

International Corporate Finance

Filters

Canadian and U.S. companies have _debt ratios given the _between the two countries.

In 1999, the overall debt ratio for all Canadian industries is_percent which is the result of_companies being included.