Question 1

The level of sales at which earnings per share (EPS) will be the same whether the firm uses debt or common stock financing is known as _____.

Accepted Answer

A)  the optimal capital structure 
B)  the beta point 
C)  the indifference point 
D)  the standard deviation of EPS 
E)  the coefficient of variation 
A)  the optimal capital structure 
B)  the beta point 
C)  the indifference point 
D)  the standard deviation of EPS 
E)  the coefficient of variation C

Question 2

Which of the following leads to less business risks compared to other factors?

Accepted Answer

A)  High percentage of fixed costs 
B)  High operating leverage 
C)  More financial risk 
D)  High interest rates 
E)  More stable operations 
A)  High percentage of fixed costs 
B)  High operating leverage 
C)  More financial risk 
D)  High interest rates 
E)  More stable operations E

Question 3

What is the formula for calculating the times-interest earned (TIE) ratio?

Accepted Answer

A)  TIE ratio = Interest charges ÷ Total liabilities 
B)  TIE ratio = Earnings per share ÷ Interest charges 
C)  TIE ratio = Sales ÷ Interest charges 
D)  TIE ratio = EBIT ÷ Interest charges 
E)  TIE ratio = Interest charges ÷ Net income 
A)  TIE ratio = Interest charges ÷ Total liabilities 
B)  TIE ratio = Earnings per share ÷ Interest charges 
C)  TIE ratio = Sales ÷ Interest charges 
D)  TIE ratio = EBIT ÷ Interest charges 
E)  TIE ratio = Interest charges ÷ Net income D

Question 4

The degree of leverage concept is designed to show how changes in sales affect earnings before interest and taxes (EBIT) and earnings per share (EPS). If a 10 percent increase in sales causes EPS to increase from $1.00 to $1.50 and if the firm uses no debt, then what is its degree of operating leverage?

Accepted Answer

A)  3.6 
B)  4.2 
C)  4.7 
D)  5.0 
E)  5.5 
A)  3.6 
B)  4.2 
C)  4.7 
D)  5.0 
E)  5.5

Question 5

It is easy to determine how P/E ratios are affected by the degree of financial leverage (DFL).

Accepted Answer

A) True 
 B)False

Question 6

The announcement of a stock offering by a mature firm that seems to have financing alternatives is taken as a signal that the firm's prospects are very good.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following is true of companies in Japan with respect to their capital structures?

Accepted Answer

A)  Companies in Japan are financed entirely through equity. 
B)  Companies in Japan use greater proportions of debt than others. 
C)  Dividends are taxed as income in Japan. 
D)  Equity monitoring costs are low in Japan. 
E)  Companies in Japan raise most of their corporate debt through publicly issued bonds. 
A)  Companies in Japan are financed entirely through equity. 
B)  Companies in Japan use greater proportions of debt than others. 
C)  Dividends are taxed as income in Japan. 
D)  Equity monitoring costs are low in Japan. 
E)  Companies in Japan raise most of their corporate debt through publicly issued bonds.

Question 8

Assume that a firm has a degree of financial leverage (DFL) of 1.25. If sales increase by 20 percent, the firm will experience a 60 percent increase in earnings per share (EPS) and it will have an earnings before interest and taxes (EBIT) of $100,000. What will be the EBIT for the firm if sales do not increase?

Accepted Answer

A)  $67,568 
B)  $100,000 
C)  $113,412 
D)  $84,375 
E)  $42,115 
A)  $67,568 
B)  $100,000 
C)  $113,412 
D)  $84,375 
E)  $42,115

Question 9

According to the trade-off theory, under which of the following conditions will a firm's capital structure be optimal?

Accepted Answer

A)  Marginal bankruptcy-related costs = 0 
B)  Marginal tax shelter benefits - Marginal bankruptcy-related costs = Interest charges 
C)  Debt/assets ratio = Marginal tax shelter benefits 
D)  Marginal tax shelter benefits = Marginal bankruptcy-related costs 
E)  Marginal tax shelter benefits = Interest charges 
A)  Marginal bankruptcy-related costs = 0 
B)  Marginal tax shelter benefits - Marginal bankruptcy-related costs = Interest charges 
C)  Debt/assets ratio = Marginal tax shelter benefits 
D)  Marginal tax shelter benefits = Marginal bankruptcy-related costs 
E)  Marginal tax shelter benefits = Interest charges

Question 10

Which of the following is true of the assumptions outlined by the capital structure theory published by Professors Franco Modigliani and Merton Miller (MM)?

Accepted Answer

A)  Personal income taxes are deductible. 
B)  Brokerage costs do not exist. 
C)  The value of the firm will be maximized by financing completely through equity. 
D)  A high debt/assets ratio decreases the value of the firm. 
E)  Bankruptcy costs are high when the firm uses no debt. 
A)  Personal income taxes are deductible. 
B)  Brokerage costs do not exist. 
C)  The value of the firm will be maximized by financing completely through equity. 
D)  A high debt/assets ratio decreases the value of the firm. 
E)  Bankruptcy costs are high when the firm uses no debt.

Question 11

The probability of incurring bankruptcy increases as a firm's debt/equity ratio decreases.

Accepted Answer

A) True 
 B)False

Question 12

In which of the following combinations of capital structuredo the common stockholders have to bear the maximum risk?

Accepted Answer

A)  100 percent equity 
B)  100 percent debt 
C)  50 percent equity and 50 percent debt 
D)  25 percent equity and 75 percent debt 
E)  75 percent equity and 25 percent debt 
A)  100 percent equity 
B)  100 percent debt 
C)  50 percent equity and 50 percent debt 
D)  25 percent equity and 75 percent debt 
E)  75 percent equity and 25 percent debt

Question 13

According to the signaling theory, when should a firm use debt beyond the normal target capital structure?

Accepted Answer

A)  When the debt/assets ratio is greater than one 
B)  When marginal tax shelter benefits are equal to marginal bankruptcy-related costs 
C)  When investors and managers have identical information about the firm's prospects 
D)  When the firm has favorable prospects 
E)  When the firm is entirely equity financed 
A)  When the debt/assets ratio is greater than one 
B)  When marginal tax shelter benefits are equal to marginal bankruptcy-related costs 
C)  When investors and managers have identical information about the firm's prospects 
D)  When the firm has favorable prospects 
E)  When the firm is entirely equity financed

Question 14

The percentage change in earnings before interest and taxes associated with a given percentage change in sales is known as the _____.

Accepted Answer

A)  degree of financial leverage 
B)  degree of operating leverage 
C)  degree of total leverage 
D)  degree of combined leverage 
E)  degree of working capital leverage 
A)  degree of financial leverage 
B)  degree of operating leverage 
C)  degree of total leverage 
D)  degree of combined leverage 
E)  degree of working capital leverage

Question 15

_____ is the single most important determinant of the capital structure of a firm.

Accepted Answer

A)  Financial leverage 
B)  Financial risk 
C)  Operating income 
D)  Business risk 
E)  Sales revenue 
A)  Financial leverage 
B)  Financial risk 
C)  Operating income 
D)  Business risk 
E)  Sales revenue

Question 16

A firm should raise capital according to its optimal capital structure so as to maximize its _____.

Accepted Answer

A)  earnings per share (EPS) 
B)  stock price 
C)  weighted average cost of capital (WAC
C)  
D)  net income 
E)  retained earnings 
A)  earnings per share (EPS) 
B)  stock price 
C)  weighted average cost of capital (WAC
C)  
D)  net income 
E)  retained earnings

Question 17

Given the following information, calculate the current price per share (P0) for Olson Corporation. The data all pertain to the year that just ended. Round the answer to two decimal places. Net income $27,475
Beta 1.5
RRF 5%
RM 9%
Dividend payout ratio 40%
Growth rate in earnings and dividends 7%
Common stock shares outstanding 10,000 shares

Accepted Answer

A)  $39.20 
B)  $57.84 
C)  $29.40 
D)  $61.90 
E)  19.59 
A)  $39.20 
B)  $57.84 
C)  $29.40 
D)  $61.90 
E)  19.59

Question 18

A ratio that measures the firm's ability to meet its annual interest obligations is known as the _____.

Accepted Answer

A)  times-interest-earned (TI
E)  ratio 
B)  degree of financial leverage (DFL) 
C)  debt/assets ratio 
D)  capitalization interest rate 
E)  current interest ratio 
A)  times-interest-earned (TI
E)  ratio 
B)  degree of financial leverage (DFL) 
C)  debt/assets ratio 
D)  capitalization interest rate 
E)  current interest ratio

Question 19

Which of the following is considered a part of financial risk?

Accepted Answer

A)  Demand variability 
B)  Sales price variability 
C)  The extent to which operating costs are fixed 
D)  Changes in interest rates on debt 
E)  The ability to change prices as costs change 
A)  Demand variability 
B)  Sales price variability 
C)  The extent to which operating costs are fixed 
D)  Changes in interest rates on debt 
E)  The ability to change prices as costs change

Question 20

A firm expects to have a 15 percent increase in sales over the coming year. If it has operating leverage equal to 1.25 and financial leverage equal to 3.50, then what will be the percentage change in earnings per share (EPS)?

Accepted Answer

A)  30% 
B)  47% 
C)  66% 
D)  15% 
E)  22% 
A)  30% 
B)  47% 
C)  66% 
D)  15% 
E)  22%

The level of sales at which earnings per share (EPS) will be the same whether the firm uses debt or common stock financing is known as _____.

Which of the following leads to less business risks compared to other factors?

What is the formula for calculating the times-interest earned (TIE) ratio?

It is easy to determine how P/E ratios are affected by the degree of financial leverage (DFL).

The announcement of a stock offering by a mature firm that seems to have financing alternatives is taken as a signal that the firm's prospects are very good.

Which of the following is true of companies in Japan with respect to their capital structures?

According to the trade-off theory, under which of the following conditions will a firm's capital structure be optimal?

Which of the following is true of the assumptions outlined by the capital structure theory published by Professors Franco Modigliani and Merton Miller (MM)?

The probability of incurring bankruptcy increases as a firm's debt/equity ratio decreases.

In which of the following combinations of capital structuredo the common stockholders have to bear the maximum risk?

According to the signaling theory, when should a firm use debt beyond the normal target capital structure?

The percentage change in earnings before interest and taxes associated with a given percentage change in sales is known as the _____.

_____ is the single most important determinant of the capital structure of a firm.

A firm should raise capital according to its optimal capital structure so as to maximize its _____.

A ratio that measures the firm's ability to meet its annual interest obligations is known as the _____.

Which of the following is considered a part of financial risk?

A firm expects to have a 15 percent increase in sales over the coming year. If it has operating leverage equal to 1.25 and financial leverage equal to 3.50, then what will be the percentage change in earnings per share (EPS)?

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters

Exam 12: Capital Structure

The level of sales at which earnings per share (EPS) will be the same whether the firm uses debt or common stock financing is known as _____.

Which of the following leads to less business risks compared to other factors?

What is the formula for calculating the times-interest earned (TIE) ratio?

It is easy to determine how P/E ratios are affected by the degree of financial leverage (DFL).

The announcement of a stock offering by a mature firm that seems to have financing alternatives is taken as a signal that the firm's prospects are very good.

Which of the following is true of companies in Japan with respect to their capital structures?

According to the trade-off theory, under which of the following conditions will a firm's capital structure be optimal?

Which of the following is true of the assumptions outlined by the capital structure theory published by Professors Franco Modigliani and Merton Miller (MM)?

The probability of incurring bankruptcy increases as a firm's debt/equity ratio decreases.

In which of the following combinations of capital structuredo the common stockholders have to bear the maximum risk?

According to the signaling theory, when should a firm use debt beyond the normal target capital structure?

The percentage change in earnings before interest and taxes associated with a given percentage change in sales is known as the _____.

_____ is the single most important determinant of the capital structure of a firm.

A firm should raise capital according to its optimal capital structure so as to maximize its _____.

A ratio that measures the firm's ability to meet its annual interest obligations is known as the _____.

Which of the following is considered a part of financial risk?

A firm expects to have a 15 percent increase in sales over the coming year. If it has operating leverage equal to 1.25 and financial leverage equal to 3.50, then what will be the percentage change in earnings per share (EPS)?

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters