Exam 12: Determining the Financing Mix

Basic tools of capital-structure management include

How do operating and financial leverage interact to affect the volatility of a firm's earnings per share?

The primary weakness of EBIT-EPS analysis is that

Which of the following statements is MOST correct concerning a corporation's optimal capital structure?

Financial leverage is typically more under the control of management than is operating leverage because the nature of the product often dictates the type of production process needed.

Techno Robots produces a functioning toy robot.At a production and sales level of 10,000 robots,the firm has the following information: Selling price per unit = $15 Variable costs per unit = $8 EBIT = $17,500 What is the break-even point in units for the firm?

Sales of consumer durable goods,such as appliances,are more sensitive to swings in the business cycle,and therefore companies in these industries face a higher level of operating risk.

Operating leverage means financing a portion of a firm's earnings per share with debt.

ABC Corp.has estimated the following income statement for its next fiscal year. a.What is the break-even point in sales dollars for the firm? b.If the average unit cost is $20,what is the break-even point in units?

Dakota Oil,Inc.reported that its sales and EBIT increased by 10%,but its EPS increased by 30%.The much larger change in earnings per share could be the result of

A high degree of variability in a firm's earnings before interest and taxes refers to

When is it useful or sometimes necessary to compute the break-even point in terms of sales dollars rather than units of output?

Voellers Upholstery Co.produces inexpensive leather chairs.The average selling price for one of the chairs is $400.The variable cost per chair is $250.Voellers has average fixed costs per year of $450,000. a.What is the break-even point in units? b.What is the break-even point in dollar sales? c.What would be the operating profit or loss associated with the production and sale of (1)3,000 chairs,(2)4,000 chairs?

Fixed costs are called indirect costs while variable costs are called direct costs.

Fixed operating costs include charges incurred from the firm's use of debt financing.

As production levels increase,fixed costs stay the same in total,but decrease on a per unit basis.

Financial structure is equal to non-interest bearing liabilities,such as accounts payable and accruals,plus capital structure,which includes short- and long-term debt,preferred stock,and common equity.

The objective of capital structure management is to maximize the market value of the firm's common stock.

A firm that uses large amounts of debt financing in an industry characterized by a high degree of business risk would have ________ earnings per share fluctuations resulting from changes in levels of sales.

The break-even model assumes that selling price per unit and variable cost per unit of output are constant over the relevant range of output.