Exam 12: Determining the Financing Mix

The break-even quantity of output is that quantity of output,in units,that results in an EBIT equal to zero.

In break-even analysis,semivariable costs are segregated into their fixed and variable components over the relevant range of output.

A saucer-shaped or U-shaped weighted average cost of capital curve results from the tax deductibility of interest,which results in the downward slope,followed by the recognition of potential financial distress costs,that cause the upward slope as the amount of debt ratio increases.

The independence hypothesis allows for bankruptcy and agency costs.

The moderate view of capital structure theory allows for the tax-deductibility of interest expense.

A firm's optimal capital structure occurs where?

The four basic determinants of business risk include all of the following EXCEPT

Raising funds internally is effectively increasing the investment of the firm's existing common shareholders.

Business risk refers to

Private equity funds tend to focus their investments in situations where promised returns are very high and the need for funds is brief.

The presence of debt and/or preferred stock in a firm's financial structure means the firm is using financial leverage.

Fixed costs per unit vary inversely with production output.

The EBIT-EPS indifference point

The more fixed-charge securities (such as bonds and preferred stock)the firm employs in its financial structure,the greater its financial leverage.

Other things the same,the use of debt financing reduces the firm's total tax bill resulting in a higher total market value.

Operating leverage is the responsiveness of a firm's EBIT to changes in sales revenues.