Question 1

A company that sells common stock and uses the money to pay off a loan is increasing its use of financial leverage.

Accepted Answer

A) True 
 B)False

Question 2

Describe the sources of business risk.

Accepted Answer

Four basic determinants of a firm's busi

Question 3

Borrowing funds using short-term debt,such as commercial paper,and using the proceeds to invest in long-term investments,creates a refinancing risk that can force firms to sell assets at distressed prices if financing becomes unavailable.

Accepted Answer

A) True 
 B)False

Question 4

Operating leverage is easier to control and manage than financial leverage because operating leverage deals with the internal workings of the company while financing deals with outside parties.

Accepted Answer

A) True 
 B)False

Question 5

According to the moderate view of capital structure theory,the cost of common equity is constant regardless of the debt financing level.

Accepted Answer

A) True 
 B)False

Question 6

Capital structure is equal to financial structure minus current liabilities.

Accepted Answer

A) True 
 B)False

Question 7

The independence hypothesis suggests that the cost of equity decreases as financial leverage increases.

Accepted Answer

A) True 
 B)False

Question 8

An increase in financial leverage will increase the absolute value of EPS,everything else equal.

Accepted Answer

A) True 
 B)False

Question 9

Because financial markets can be extremely volatile,with bond and stock prices changing significantly from day to day,a firm's management has much greater control over the firm's operating leverage than over its financial leverage.

Accepted Answer

A) True 
 B)False

Question 10

Financing a portion of a firm's assets with securities bearing a fixed rate of return in hopes of increasing the return to stockholders refers to

Accepted Answer

A)  business risk. 
B)  financial leverage. 
C)  operating leverage. 
D)  combined leverage. 
A)  business risk. 
B)  financial leverage. 
C)  operating leverage. 
D)  combined leverage.

Question 11

Premium Lodging,Inc.,is financed entirely with 3 million shares of common stock selling for $50 a share.Capital of $10 million is needed for this year's capital budget.Additional funds can be raised with new stock (ignore dilution)or with 11 percent 12-year bonds.Premium Lodging's tax rate is 35 percent.
Calculate the financing plan's EBIT indifference point.

Accepted Answer

@#IMG-DLM& = @#IMG-DLM& EBIT =

Question 12

How do agency costs and free cash flow relate to capital structure management?

Accepted Answer

Agency problems stem from conflicts of i

Question 13

Mix Sweet Shop bakes and sells pies.Mix has annual fixed costs of $880,000 and a variable cost per pie of $7.50.Each pie sells for $15.50 each.The firm expects to sell 500,000 pies annually.What is the break-even point in sales dollars?

Accepted Answer

A)  $3,100,000 
B)  $2,875,000 
C)  $1,705,000 
D)  $1,625,000 
A)  $3,100,000 
B)  $2,875,000 
C)  $1,705,000 
D)  $1,625,000

Question 14

Financial structure includes long- and short-term sources of funds.

Accepted Answer

A) True 
 B)False

Question 15

Stan's Cans,Inc.expects to earn $150,000 next year after taxes on sales of $2,200,000.Stan's manufactures only one size of garbage can.Stan sells his cans for $8 apiece and they have a variable cost of $2.40 apiece.Stan's tax rate is currently 34%.
a.What are the firm's expected fixed costs for next year?
b.What is the break-even point in units?

Accepted Answer

a.([P × Q] - [(V × Q)+ F])(1 -

Question 16

Which of the following statements about combined (operating & financial)leverage is true?

Accepted Answer

A)  If a firm employs both operating and financial leverage, any percent change in sales will produce a larger percent change in earnings per share. 
B)  A firm that is in a capital-intensive industry should use a higher level of financial leverage than a firm that employs low levels of operating leverage. 
C)  Usage of both operating and financial leverage reduces a firm's risk. 
D)  High operating leverage and high financial leverage offset one another, meaning that if sales increase by 10%, then EPS will also increase by 10%. 
A)  If a firm employs both operating and financial leverage, any percent change in sales will produce a larger percent change in earnings per share. 
B)  A firm that is in a capital-intensive industry should use a higher level of financial leverage than a firm that employs low levels of operating leverage. 
C)  Usage of both operating and financial leverage reduces a firm's risk. 
D)  High operating leverage and high financial leverage offset one another, meaning that if sales increase by 10%, then EPS will also increase by 10%.

Question 17

Which of the following would be considered the firm's optimal capital structure?

Accepted Answer

A)  Stock Price = $25, Earnings Per Share = $10, Cost of Equity Capital = 15% 
B)  Stock Price = $23, Earnings Per Share = $11, Cost of Equity Capital = 18% 
C)  Stock Price = $24, Earnings Per Share = $12, Cost of Equity Capital = 17% 
D)  Stock Price = $20, Earnings Per Share = $12, Cost of Equity Capital = 20% 
A)  Stock Price = $25, Earnings Per Share = $10, Cost of Equity Capital = 15% 
B)  Stock Price = $23, Earnings Per Share = $11, Cost of Equity Capital = 18% 
C)  Stock Price = $24, Earnings Per Share = $12, Cost of Equity Capital = 17% 
D)  Stock Price = $20, Earnings Per Share = $12, Cost of Equity Capital = 20%

Question 18

The Modigliani and Miller hypothesis suggests that capital structure doesn't matter.All of the following conditions need to be met for this hypothesis to be true EXCEPT

Accepted Answer

A)  corporate income is not subject to taxation. 
B)  capital structure consists only of stocks and bonds. 
C)  securities are traded in perfect or efficient markets. 
D)  all corporate net income is paid out as dividends. 
A)  corporate income is not subject to taxation. 
B)  capital structure consists only of stocks and bonds. 
C)  securities are traded in perfect or efficient markets. 
D)  all corporate net income is paid out as dividends.

Question 19

The EBIT-EPS indifference point is the level of production at which the company's EBIT equals its EPS.

Accepted Answer

A) True 
 B)False

Question 20

The break-even model enables the manager of the firm to

Accepted Answer

A)  calculate the minimum price of common stock for certain situations. 
B)  set appropriate equilibrium thresholds. 
C)  determine the quantity of output that must be sold to cover all operating costs. 
D)  determine the optimal amount of debt financing to use. 
A)  calculate the minimum price of common stock for certain situations. 
B)  set appropriate equilibrium thresholds. 
C)  determine the quantity of output that must be sold to cover all operating costs. 
D)  determine the optimal amount of debt financing to use.

A company that sells common stock and uses the money to pay off a loan is increasing its use of financial leverage.

Describe the sources of business risk.

Borrowing funds using short-term debt,such as commercial paper,and using the proceeds to invest in long-term investments,creates a refinancing risk that can force firms to sell assets at distressed prices if financing becomes unavailable.

Operating leverage is easier to control and manage than financial leverage because operating leverage deals with the internal workings of the company while financing deals with outside parties.

According to the moderate view of capital structure theory,the cost of common equity is constant regardless of the debt financing level.

Capital structure is equal to financial structure minus current liabilities.

The independence hypothesis suggests that the cost of equity decreases as financial leverage increases.

An increase in financial leverage will increase the absolute value of EPS,everything else equal.

Because financial markets can be extremely volatile,with bond and stock prices changing significantly from day to day,a firm's management has much greater control over the firm's operating leverage than over its financial leverage.

Financing a portion of a firm's assets with securities bearing a fixed rate of return in hopes of increasing the return to stockholders refers to

How do agency costs and free cash flow relate to capital structure management?

Mix Sweet Shop bakes and sells pies.Mix has annual fixed costs of $880,000 and a variable cost per pie of $7.50.Each pie sells for $15.50 each.The firm expects to sell 500,000 pies annually.What is the break-even point in sales dollars?

Financial structure includes long- and short-term sources of funds.

Which of the following statements about combined (operating & financial)leverage is true?

Which of the following would be considered the firm's optimal capital structure?

The Modigliani and Miller hypothesis suggests that capital structure doesn't matter.All of the following conditions need to be met for this hypothesis to be true EXCEPT

The EBIT-EPS indifference point is the level of production at which the company's EBIT equals its EPS.

The break-even model enables the manager of the firm to

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

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Exam 12: Determining the Financing Mix

A company that sells common stock and uses the money to pay off a loan is increasing its use of financial leverage.

Describe the sources of business risk.

Borrowing funds using short-term debt,such as commercial paper,and using the proceeds to invest in long-term investments,creates a refinancing risk that can force firms to sell assets at distressed prices if financing becomes unavailable.

Operating leverage is easier to control and manage than financial leverage because operating leverage deals with the internal workings of the company while financing deals with outside parties.

According to the moderate view of capital structure theory,the cost of common equity is constant regardless of the debt financing level.

Capital structure is equal to financial structure minus current liabilities.

The independence hypothesis suggests that the cost of equity decreases as financial leverage increases.

An increase in financial leverage will increase the absolute value of EPS,everything else equal.

Because financial markets can be extremely volatile,with bond and stock prices changing significantly from day to day,a firm's management has much greater control over the firm's operating leverage than over its financial leverage.

Financing a portion of a firm's assets with securities bearing a fixed rate of return in hopes of increasing the return to stockholders refers to

How do agency costs and free cash flow relate to capital structure management?

Mix Sweet Shop bakes and sells pies.Mix has annual fixed costs of $880,000 and a variable cost per pie of $7.50.Each pie sells for $15.50 each.The firm expects to sell 500,000 pies annually.What is the break-even point in sales dollars?

Financial structure includes long- and short-term sources of funds.

Which of the following statements about combined (operating & financial)leverage is true?

Which of the following would be considered the firm's optimal capital structure?

The Modigliani and Miller hypothesis suggests that capital structure doesn't matter.All of the following conditions need to be met for this hypothesis to be true EXCEPT

The EBIT-EPS indifference point is the level of production at which the company's EBIT equals its EPS.

The break-even model enables the manager of the firm to

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters