Exam 12: Determining the Financing Mix

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

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

Business risk refers to

Which of the following transactions will lower a company's financial leverage?

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

Break-even analysis ignores fixed costs because fixed costs do not change.

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

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

Financial structure is another term for capital structure.

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.

ACME,Inc.reported the following income statement for 2009: If ACME's sales next year increase by 20%,what will ACME's earnings per share be?

If a company sells bonds and uses the proceeds to buy back common stock,the company's financial leverage with increase.

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

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?

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

Potential applications of the break-even model include

The EBIT-EPS indifference point

The "threat hypothesis"

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.

Financial risk applies to both the additional variability in earnings available to common shareholders and the additional chance of insolvency caused by the use of financial leverage.