Question 1

M and M Proposition II states that

Accepted Answer

A)  the value of a firm's assets and operations does not change with changes in the firm's capital structure. 
B)  the value of the firm is maximized when the WACC after-tax is minimized. 
C)  the cost of equity is a positive linear function of its capital structure. 
D)  the only risk relevant in measuring the cost of equity is business risk. 
A)  the value of a firm's assets and operations does not change with changes in the firm's capital structure. 
B)  the value of the firm is maximized when the WACC after-tax is minimized. 
C)  the cost of equity is a positive linear function of its capital structure. 
D)  the only risk relevant in measuring the cost of equity is business risk.

Question 2

A major assumption of break-even analysis and one which causes severe limitations in its use is that

Accepted Answer

A)  revenues and operating costs are linear. 
B)  all costs are really semi-variable. 
C)  fixed costs really are fixed. 
D)  total revenue is nonlinear. 
A)  revenues and operating costs are linear. 
B)  all costs are really semi-variable. 
C)  fixed costs really are fixed. 
D)  total revenue is nonlinear.

Question 3

Noncash charges such as depreciation and amortization_________the firm's break-even point.

Accepted Answer

A)  do not affect 
B)  decrease 
C)  overstate 
D)  understate 
A)  do not affect 
B)  decrease 
C)  overstate 
D)  understate

Question 4

A firm has fixed operating costs of $175,000, total sales revenue of $3,000,000 and total variable costs of $2,250,000.The firm's degree of operating leverage is __________ .

Accepted Answer

A)  0.81 
B)  4.29 
C)  0.77 
D)  1.30 
A)  0.81 
B)  4.29 
C)  0.77 
D)  1.30

Question 5

The total leverage measures the combined effect of operating and financial leverage on the firm's risk.

Accepted Answer

A) True 
 B)False

Question 6

Poor capital structure decisions can result in___________the cost of capital, resulting in___________acceptable investments. Effective capital structure decisions can___________ the cost of capital,resulting in ___________acceptable investments.

Accepted Answer

A)  increasing; more; lower, fewer 
B)  decreasing; fewer; higher; more 
C)  decreasing; more; higher; fewer 
D)  increasing; fewer; lower; more 
A)  increasing; more; lower, fewer 
B)  decreasing; fewer; higher; more 
C)  decreasing; more; higher; fewer 
D)  increasing; fewer; lower; more

Question 7

If a firm's variable costs per unit increase, the firm's operating break-even point will

Accepted Answer

A)  increase. 
B)  remain unchanged. 
C)  decrease. 
D)  change in an undetermined direction. 
A)  increase. 
B)  remain unchanged. 
C)  decrease. 
D)  change in an undetermined direction.

Question 8

The amount of leverage in the firm's capital structure-the mix of long-term debt and equity maintained by the firm-can significantly affect its value by affecting return and risk.

Accepted Answer

A) True 
 B)False

Question 9

After satisfying obligations to creditors, the government, and preferred stockholders, any remaining earnings will most likely be allocated to any of the following EXCEPT

Accepted Answer

A)  retention by the firm for future investment. 
B)  common shareholders as cash dividends. 
C)  common shareholders as stock dividends. 
D)  a combination of retained earnings and cash dividends. 
A)  retention by the firm for future investment. 
B)  common shareholders as cash dividends. 
C)  common shareholders as stock dividends. 
D)  a combination of retained earnings and cash dividends.

Question 10

The probability that a firm will become bankrupt is largely dependent on its level of both business risk and financial risk.

Accepted Answer

A) True 
 B)False

Question 11

Minimizing the weighted average cost of capital allows management to undertake a larger number of profitable projects, thereby further increasing the value of the firm.

Accepted Answer

A) True 
 B)False

Question 12

_________is the potential use of fixed financial charges to magnify the effects of changes in earningsbefore interest and taxes on the firm's earnings per share.

Accepted Answer

A)  Operating leverage 
B)  Financial leverage 
C)  Total leverage 
D)  Debt service 
A)  Operating leverage 
B)  Financial leverage 
C)  Total leverage 
D)  Debt service

Question 13

The degree of operating leverage depends on the base level of sales used as a point of reference.The closer the base sales level used is to the operating break-even point, the greater the operating leverage.

Accepted Answer

A) True 
 B)False

Question 14

Since the sales price per unit generally decreases with volume and the cost per unit generally increases with volume, the true break-even point may be different from those obtained using linear revenue and cost functions as assumed in the break-even analysis.

Accepted Answer

A) True 
 B)False

Question 15

A firm is analyzing two possible capital structures-30 and 50 percent debt ratios. The firm has total assets of $5,000,000 and common stock valued at $50 per share. The firm has a marginal tax rate of40 percent on ordinary income. If the interest rate on debt is 7 percent and 9 percent for the 30 percent and the 50 percent debt ratios, respectively, the amount of interest on the debt under each of the capital structures being considered would be

Accepted Answer

A)  30 percent debt ratio: $135,000 and 50 percent debt ratio: $175,000. 
B)  30 percent debt ratio: $245,000 and 50 percent debt ratio: $225,000. 
C)  30 percent debt ratio: $105,000 and 50 percent debt ratio: $250,000. 
D)  30 percent debt ratio: $105,000 and 50 percent debt ratio: $225,000. 
A)  30 percent debt ratio: $135,000 and 50 percent debt ratio: $175,000. 
B)  30 percent debt ratio: $245,000 and 50 percent debt ratio: $225,000. 
C)  30 percent debt ratio: $105,000 and 50 percent debt ratio: $250,000. 
D)  30 percent debt ratio: $105,000 and 50 percent debt ratio: $225,000.

Question 16

The preferred approach to break-even analysis for the multiproduct firm is the

Accepted Answer

A)  break-even point expressed in dollars. 
B)  overall break-even point. 
C)  cash break-even point. 
D)  break-even point expressed in units. 
A)  break-even point expressed in dollars. 
B)  overall break-even point. 
C)  cash break-even point. 
D)  break-even point expressed in units.

Question 17

Financial leverage may be defined as the potential use of variable financial costs to magnify the effects of changes in earnings before interest and taxes (EBIT) on the firm's earnings per share (EPS).

Accepted Answer

A) True 
 B)False

Question 18

At the operating break-even point, the sales revenue is equal to the sum of the fixed and variable operating costs.

Accepted Answer

A) True 
 B)False

Question 19

All of the following affect business risk EXCEPT

Accepted Answer

A)  revenue stability. 
B)  interest rate stability. 
C)  operating leverage. 
D)  cost stability. 
A)  revenue stability. 
B)  interest rate stability. 
C)  operating leverage. 
D)  cost stability.

Question 20

Break-even analysis is used by the firm

Accepted Answer

A)  to determine the level of operations necessary to cover all operating costs. 
B)  to evaluate the profitability associated with various levels of sales. 
C)  for both A and B. 
D)  for none of the above. 
A)  to determine the level of operations necessary to cover all operating costs. 
B)  to evaluate the profitability associated with various levels of sales. 
C)  for both A and B. 
D)  for none of the above.

M and M Proposition II states that

A major assumption of break-even analysis and one which causes severe limitations in its use is that

Noncash charges such as depreciation and amortization_________the firm's break-even point.

A firm has fixed operating costs of $175,000, total sales revenue of $3,000,000 and total variable costs of $2,250,000.The firm's degree of operating leverage is __________ .

The total leverage measures the combined effect of operating and financial leverage on the firm's risk.

Poor capital structure decisions can result in_____the cost of capital, resulting in_acceptable investments. Effective capital structure decisions can_ the cost of capital,resulting in _____acceptable investments.

If a firm's variable costs per unit increase, the firm's operating break-even point will

The amount of leverage in the firm's capital structure-the mix of long-term debt and equity maintained by the firm-can significantly affect its value by affecting return and risk.

After satisfying obligations to creditors, the government, and preferred stockholders, any remaining earnings will most likely be allocated to any of the following EXCEPT

The probability that a firm will become bankrupt is largely dependent on its level of both business risk and financial risk.

Minimizing the weighted average cost of capital allows management to undertake a larger number of profitable projects, thereby further increasing the value of the firm.

_________is the potential use of fixed financial charges to magnify the effects of changes in earningsbefore interest and taxes on the firm's earnings per share.

The degree of operating leverage depends on the base level of sales used as a point of reference.The closer the base sales level used is to the operating break-even point, the greater the operating leverage.

Since the sales price per unit generally decreases with volume and the cost per unit generally increases with volume, the true break-even point may be different from those obtained using linear revenue and cost functions as assumed in the break-even analysis.

The preferred approach to break-even analysis for the multiproduct firm is the

Financial leverage may be defined as the potential use of variable financial costs to magnify the effects of changes in earnings before interest and taxes (EBIT) on the firm's earnings per share (EPS).

At the operating break-even point, the sales revenue is equal to the sum of the fixed and variable operating costs.

All of the following affect business risk EXCEPT

Break-even analysis is used by the firm

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

M and M Proposition II states that

A major assumption of break-even analysis and one which causes severe limitations in its use is that

Noncash charges such as depreciation and amortization_________the firm's break-even point.

A firm has fixed operating costs of $175,000, total sales revenue of $3,000,000 and total variable costs of $2,250,000.The firm's degree of operating leverage is __________ .

The total leverage measures the combined effect of operating and financial leverage on the firm's risk.

Poor capital structure decisions can result in___________the cost of capital, resulting in___________acceptable investments. Effective capital structure decisions can___________ the cost of capital,resulting in ___________acceptable investments.

If a firm's variable costs per unit increase, the firm's operating break-even point will

The amount of leverage in the firm's capital structure-the mix of long-term debt and equity maintained by the firm-can significantly affect its value by affecting return and risk.

After satisfying obligations to creditors, the government, and preferred stockholders, any remaining earnings will most likely be allocated to any of the following EXCEPT

The probability that a firm will become bankrupt is largely dependent on its level of both business risk and financial risk.

Minimizing the weighted average cost of capital allows management to undertake a larger number of profitable projects, thereby further increasing the value of the firm.

_________is the potential use of fixed financial charges to magnify the effects of changes in earningsbefore interest and taxes on the firm's earnings per share.

The degree of operating leverage depends on the base level of sales used as a point of reference.The closer the base sales level used is to the operating break-even point, the greater the operating leverage.

Since the sales price per unit generally decreases with volume and the cost per unit generally increases with volume, the true break-even point may be different from those obtained using linear revenue and cost functions as assumed in the break-even analysis.

The preferred approach to break-even analysis for the multiproduct firm is the

Financial leverage may be defined as the potential use of variable financial costs to magnify the effects of changes in earnings before interest and taxes (EBIT) on the firm's earnings per share (EPS).

At the operating break-even point, the sales revenue is equal to the sum of the fixed and variable operating costs.

All of the following affect business risk EXCEPT

Break-even analysis is used by the firm

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

Poor capital structure decisions can result in_____the cost of capital, resulting in_acceptable investments. Effective capital structure decisions can_ the cost of capital,resulting in _____acceptable investments.