Question 1

A firm has interest expense of $145,000, preferred dividends of $25,000, and a tax rate of 40 percent.The firm's financial break-even point is _________.

Accepted Answer

A)  $186,667 
B)  $ 25,000 
C)  $170,000 
D)  $145,000 
A)  $186,667 
B)  $ 25,000 
C)  $170,000 
D)  $145,000

Question 2

The_________approach to capital structure proposes that an optimal capital structure be selected which_________.

Accepted Answer

A)  M and M; maximizes the weighted average cost of capital 
B)  residual theory; minimizes dividends 
C)  EBIT-EPS; maximizes the EPS 
D)  traditional; minimizes the cost of debt 
A)  M and M; maximizes the weighted average cost of capital 
B)  residual theory; minimizes dividends 
C)  EBIT-EPS; maximizes the EPS 
D)  traditional; minimizes the cost of debt

Question 3

M and M Proposition I 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 4

A firm has fixed operating costs of $25,000, a per unit sales price of $5, and a variable cost per unit of $3. What is its operating break-even point if it desires net operating income of $10,000, not $0 (zero)?

Accepted Answer

A)  15,000 units 
B)  17,500 units 
C)  12,500 units 
D)  25,000 units 
A)  15,000 units 
B)  17,500 units 
C)  12,500 units 
D)  25,000 units

Question 5

For sales levels below the operating break-even point, sales revenue exceeds total operating costs, and earnings before interest and taxes is greater than zero.

Accepted Answer

A) True 
 B)False

Question 6

The contribution margin is defined as the percent of each sales dollar that remains after satisfying fixed operating costs.

Accepted Answer

A) True 
 B)False

Question 7

The inexpensive nature of long-term debt in a firm's capital structure is due to the fact that

Accepted Answer

A)  the equity holders are the true owners of the firm. 
B)  equity holders have a higher position in the priority of claims. 
C)  interest payments are tax-deductible. 
D)  equity capital has a fixed return. 
A)  the equity holders are the true owners of the firm. 
B)  equity holders have a higher position in the priority of claims. 
C)  interest payments are tax-deductible. 
D)  equity capital has a fixed return.

Question 8

_________is the potential use of fixed operating costs to magnify the effects of changes in sales on earnings before interest and taxes.

Accepted Answer

A)  Financial leverage 
B)  Total leverage 
C)  Operating leverage 
D)  Ratio analysis 
A)  Financial leverage 
B)  Total leverage 
C)  Operating leverage 
D)  Ratio analysis

Question 9

_________leverage is concerned with the relationship between sales revenues and earnings beforeinterest and taxes.

Accepted Answer

A)  Financial 
B)  Total 
C)  Operating 
D)  Variable 
A)  Financial 
B)  Total 
C)  Operating 
D)  Variable

Question 10

Firms having stable and predictable revenues can more safely undertake highly leveraged capital structures than can firms with volatile patterns of sales revenue.

Accepted Answer

A) True 
 B)False

Question 11

A shift toward more fixed costs increases business risk, which in turn causes earnings beforeinterest and taxes to increase by less for a given increase in sales.

Accepted Answer

A) True 
 B)False

Question 12

Generally,__________in leverage result in,__________return and,__________risk.

Accepted Answer

A)  increases, increased, increased 
B)  increases, decreased, increased 
C)  decreases, increased, decreased 
D)  increases, decreased, decreased 
A)  increases, increased, increased 
B)  increases, decreased, increased 
C)  decreases, increased, decreased 
D)  increases, decreased, decreased

Question 13

In theory, the firm should maintain financial leverage consistent with a capital structure that

Accepted Answer

A)  maximizes the earnings per share. 
B)  meets the industry standard. 
C)  maximizes dividends. 
D)  maximizes the owner's wealth. 
A)  maximizes the earnings per share. 
B)  meets the industry standard. 
C)  maximizes dividends. 
D)  maximizes the owner's wealth.

Question 14

A corporation has $5,000,000 in 8 percent preferred stock outstanding and a 40 percent tax rate. The aftertax cost of the preferred stock is___________.

Accepted Answer

A)  $160,000 
B)  $666,667 
C)  $240,000 
D)  $400,000 
A)  $160,000 
B)  $666,667 
C)  $240,000 
D)  $400,000

Question 15

The more fixed cost financing a firm has in its capital structure, the greater its financial leverage and risk.

Accepted Answer

A) True 
 B)False

Question 16

Breakeven analysis is used by the firm to determine the level of operations necessary to cover all fixed operating costs and to evaluate the profitability associated with various levels of sales.

Accepted Answer

A) True 
 B)False

Question 17

__________is the potential use of fixed costs, both operating and financial, to magnify the effect of changes in sales on the firm's earnings per share.

Accepted Answer

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

Question 18

Operating leverage results from the existence of operating costs in the firm's income stream.

Accepted Answer

A) True 
 B)False

Question 19

The financial break-even point represents the level of earnings before interest and taxes necessary for the firm to cover its fixed operating and financial changes-that is, the point at which earnings per share (EPS) is equal to zero.

Accepted Answer

A) True 
 B)False

Question 20

A firm has fixed operating costs of $10,000, the sale price per unit of its product is $25, and its variable cost per unit is $15. The firm's operating break-even point in units is___________ and its breakeven point in dollars is___________ .

Accepted Answer

A)  400; $10,000 
B)  250; $ 6,250 
C)  667; $16,675 
D)  1,000; $25,000 
A)  400; $10,000 
B)  250; $ 6,250 
C)  667; $16,675 
D)  1,000; $25,000

A firm has interest expense of $145,000, preferred dividends of $25,000, and a tax rate of 40 percent.The firm's financial break-even point is _________.

The_approach to capital structure proposes that an optimal capital structure be selected which_.

M and M Proposition I states that

A firm has fixed operating costs of $25,000, a per unit sales price of $5, and a variable cost per unit of $3. What is its operating break-even point if it desires net operating income of $10,000, not $0 (zero)?

For sales levels below the operating break-even point, sales revenue exceeds total operating costs, and earnings before interest and taxes is greater than zero.

The contribution margin is defined as the percent of each sales dollar that remains after satisfying fixed operating costs.

The inexpensive nature of long-term debt in a firm's capital structure is due to the fact that

_________is the potential use of fixed operating costs to magnify the effects of changes in sales on earnings before interest and taxes.

_________leverage is concerned with the relationship between sales revenues and earnings beforeinterest and taxes.

Firms having stable and predictable revenues can more safely undertake highly leveraged capital structures than can firms with volatile patterns of sales revenue.

A shift toward more fixed costs increases business risk, which in turn causes earnings beforeinterest and taxes to increase by less for a given increase in sales.

Generally,in leverage result in,return and,__risk.

In theory, the firm should maintain financial leverage consistent with a capital structure that

A corporation has $5,000,000 in 8 percent preferred stock outstanding and a 40 percent tax rate. The aftertax cost of the preferred stock is___________.

The more fixed cost financing a firm has in its capital structure, the greater its financial leverage and risk.

Breakeven analysis is used by the firm to determine the level of operations necessary to cover all fixed operating costs and to evaluate the profitability associated with various levels of sales.

__________is the potential use of fixed costs, both operating and financial, to magnify the effect of changes in sales on the firm's earnings per share.

Operating leverage results from the existence of operating costs in the firm's income stream.

The financial break-even point represents the level of earnings before interest and taxes necessary for the firm to cover its fixed operating and financial changes-that is, the point at which earnings per share (EPS) is equal to zero.

A firm has fixed operating costs of $10,000, the sale price per unit of its product is $25, and its variable cost per unit is $15. The firm's operating break-even point in units is_ and its breakeven point in dollars is_ .

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

A firm has interest expense of $145,000, preferred dividends of $25,000, and a tax rate of 40 percent.The firm's financial break-even point is _________.

The_________approach to capital structure proposes that an optimal capital structure be selected which_________.

M and M Proposition I states that

A firm has fixed operating costs of $25,000, a per unit sales price of $5, and a variable cost per unit of $3. What is its operating break-even point if it desires net operating income of $10,000, not $0 (zero)?

For sales levels below the operating break-even point, sales revenue exceeds total operating costs, and earnings before interest and taxes is greater than zero.

The contribution margin is defined as the percent of each sales dollar that remains after satisfying fixed operating costs.

The inexpensive nature of long-term debt in a firm's capital structure is due to the fact that

_________is the potential use of fixed operating costs to magnify the effects of changes in sales on earnings before interest and taxes.

_________leverage is concerned with the relationship between sales revenues and earnings beforeinterest and taxes.

Firms having stable and predictable revenues can more safely undertake highly leveraged capital structures than can firms with volatile patterns of sales revenue.

A shift toward more fixed costs increases business risk, which in turn causes earnings beforeinterest and taxes to increase by less for a given increase in sales.

Generally,__________in leverage result in,__________return and,__________risk.

In theory, the firm should maintain financial leverage consistent with a capital structure that

A corporation has $5,000,000 in 8 percent preferred stock outstanding and a 40 percent tax rate. The aftertax cost of the preferred stock is___________.

The more fixed cost financing a firm has in its capital structure, the greater its financial leverage and risk.

Breakeven analysis is used by the firm to determine the level of operations necessary to cover all fixed operating costs and to evaluate the profitability associated with various levels of sales.

__________is the potential use of fixed costs, both operating and financial, to magnify the effect of changes in sales on the firm's earnings per share.

Operating leverage results from the existence of operating costs in the firm's income stream.

The financial break-even point represents the level of earnings before interest and taxes necessary for the firm to cover its fixed operating and financial changes-that is, the point at which earnings per share (EPS) is equal to zero.

A firm has fixed operating costs of $10,000, the sale price per unit of its product is $25, and its variable cost per unit is $15. The firm's operating break-even point in units is___________ and its breakeven point in dollars is___________ .

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

The_approach to capital structure proposes that an optimal capital structure be selected which_.

Generally,in leverage result in,return and,__risk.

A firm has fixed operating costs of $10,000, the sale price per unit of its product is $25, and its variable cost per unit is $15. The firm's operating break-even point in units is_ and its breakeven point in dollars is_ .