Exam 10: Leverage and Capital Structure

A firm has fixed operating costs of $650,000, a sales price per unit of $20, and a variable cost per unit of $13. At a base sales level of 500,000 units, the firm's degree of operating leverage is_________.

Business risk is affected by all of the following EXCEPT

In the traditional approach to capital structure, as the amount of debt increases in a firm's capital structure,

A corporation borrows $1,000,000 at 10 percent annual rate of interest. The firm has a 40 percent taxrate. The yearly, aftertax cost of this debt is ___________ .

If we assume that EBIT is constant, the value of the firm is maximized by minimizing the weighted average cost of capital.

The per dollar contribution toward fixed operating costs and profits provided by each dollar ofsales is the

In order to enhance the wealth of stockholders and to send positive signals to the market,corporations generally raise funds using the following order

___________leverage is concerned with the relationship between sales revenue and earnings per share.

The firm's operating break-even point is the level of sales necessary to cover all fixed operatingcosts.

Generally, increases in leverage result in increased return and risk.

Whenever the percentage change in earnings before interest and taxes resulting from a given percentage change in sales is greater than the percentage change in sales, operating leverage exists.

The degree of operating leverage will increase if a firm decides to compensate its sales representatives with a fixed salary and bonus rather than with a pure percent-of-sales commission.

A firm has a current capital structure consisting of $400,000 of 12 percent annual interest debt and50,000 shares of common stock. The firm's tax rate is 40 percent on ordinary income. If the EBIT isexpected to be $200,000, the firm's earnings per share will be_________.

The base level of EBIT must be held constant to compare the financial leverage associated with different levels of fixed financial costs.

As debt is substituted for equity in the capital structure and the debt ratio increases, the behavior of the overall cost of capital is partially explained by

The breakeven point in dollars can be computed by dividing the contribution margin into the fixed operating costs.

When considering fixed operating cost increases, the financial manager must weigh the increased financial risk associated with greater operating leverage against the expected increase in returns.

A corporation has $10,000,000 in 10 percent preferred stock outstanding and a 40 percent tax rate.The amount of earnings before interest and taxes (EBIT) required to pay the preferred dividends is_________.

If a firm's fixed financial costs decrease, the firm's operating break-even point will

Pecking order is a hierarchy of financing beginning with retained earnings followed by debt financing and finally external equity financing.