Exam 12: Determining the Financing Mix

Two key components of a prudent capital structure are the debt maturity composition and the debt to equity composition.

The three major components responsible for variation in a company's income stream are business risk,operating risk,and financial risk.

The Knight Corporation projects that next year its fixed costs will total $240,000.Its only product sells for $34 per unit,of which $18 is a variable cost.The management of Knight is considering the purchase of a new machine that will lower the variable cost per unit to $14.The new machine,however,will add to fixed costs through an increase in depreciation expense.How large can the addition to fixed costs be in order to keep the firm's break-even point in units produced and sold unchanged?

Break-even analysis is a short-term concept because,in the long run,all costs are variable.

An EBIT-EPS analysis allows the decision maker to visualize the impact of different financing plans on EPS over a range of EBIT levels.

Which of the following would be considered a variable cost in a manufacturing setting?

Which of the following statements about financial leverage is true?

Given taxes and bankruptcy costs exist,as financial leverage increases,the weighted average cost of capital first decreases and then increases.

One danger of EBIT-EPS analysis is that it ignores the implicit cost of debt financing.

The implicit cost of debt takes into consideration the change in the cost of common equity brought on by using additional debt.

Variation in a company's income stream results from its choice of business line,its choice of an operating cost structure,and its choice of a capital structure.

The break-even point is equal to

Balon Plastics,Inc.is financed entirely with 3 million shares of common stock selling for $20 a share.Capital of $4 million is needed for this year's capital budget.Additional funds can be raised with new stock (ignore dilution)or with 13 percent 10-year bonds.The firm's tax rate is 40 percent. a.Calculate the financing plan's EBIT indifference point. b.The expected level of EBIT is $10,320,000 with a standard deviation of $2,000,000.What is the probability that EBIT will be above the indifference point? c.Does the "indifference point" calculated in question (a)above truly represent a point where stockholders are indifferent between stock and debt financing? Explain your answer.

When deciding upon how much debt financing to employ,most practitioners would cite which of the following as the most important influence on the level of the debt ratio?

Break-even analysis is used to study the effect on EBIT of changes in all of the following EXCEPT

The control hypothesis suggests that shareholders prefer an increase in the firm's debt in order to reduce the agency costs associated with excessive free cash flow.

Kohler Manufacturing typically achieves one of three production levels in any given year: 8 million pounds of steel,10 million pounds of steel,or 16 million pounds of steel.In tracking some of its costs,Kohler's controller discovered one cost that was $10 per pound no matter what the production level for the year.This is an example of a

ACME,Inc.reported the following income statement for 2009: If ACME's sales next year increase by 20%,ACME's EBIT will increase

HomeCraft makes wooden play sets.The company pays annual rent of $400,000 per year and pays administrative salaries totaling $150,000 per year.Each play set requires $400 of wood,ten hours of labor at $70 per hour,and variable overhead costs of $100.Fixed advertising expenses equal $100,000 per year.Each play set sells for $3,200.What is HomeCraft's break-even output level?

The Western Boot Company will produce 94,000 pairs of boots next year.Variable costs are 35 percent of sales,while fixed costs total $223,000.At what price must each pair of boots be sold for Western to obtain an EBIT of $1,391,500?