Question 1

The primary weakness of EBIT-EPS analysis is that

Accepted Answer

A) it ignores the implicit cost of debt financing. 
B) it double counts the cost of debt financing. 
C) it applies only to firms with large amounts of debt in their capital structure. 
D) it may only be used by firms that are profitable this year. 
A) it ignores the implicit cost of debt financing. 
B) it double counts the cost of debt financing. 
C) it applies only to firms with large amounts of debt in their capital structure. 
D) it may only be used by firms that are profitable this year.

Question 2

Corporations utilize external financing either because they do not have sufficient earnings to reinvest or they want to rebalance their capital structures.

Accepted Answer

A) True 
 B)False

Question 3

Break-even analysis assumes that a multiproduct firm maintains a constant production and sales mix.

Accepted Answer

A) True 
 B)False

Question 4

A firm's optimal capital structure occurs where?

Accepted Answer

A) EPS are maximized,and WACC is minimized. 
B) Stock price is maximized,and EPS are maximized. 
C) Stock price is maximized,and WACC is maximized. 
D) WACC is minimized,and stock price is maximized. 
A) EPS are maximized,and WACC is minimized. 
B) Stock price is maximized,and EPS are maximized. 
C) Stock price is maximized,and WACC is maximized. 
D) WACC is minimized,and stock price is maximized.

Question 5

Financial leverage could mean financing some of a firm's assets with

Accepted Answer

A) preferred stock. 
B) retained earnings. 
C) private equity capital. 
D) sales revenues. 
A) preferred stock. 
B) retained earnings. 
C) private equity capital. 
D) sales revenues.

Question 6

A company that sells preferred stock and uses the money to pay off a loan is decreasing its amount of financial leverage.

Accepted Answer

A) True 
 B)False

Question 7

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?

Accepted Answer

A) providing a borrowing reserve 
B) maintaining desired bond rating 
C) ability to adequately meet financing charges 
D) exploiting advantages of financial leverage 
A) providing a borrowing reserve 
B) maintaining desired bond rating 
C) ability to adequately meet financing charges 
D) exploiting advantages of financial leverage

Question 8

Because fixed costs do not vary with a firm's revenues,firm's with high levels of fixed cost enjoy lower levels of operating risk because their costs are more certain,making budgeting easier.

Accepted Answer

A) True 
 B)False

Question 9

The optimal capital structure is the funds mix that will

Accepted Answer

A) minimize the use of debt. 
B) achieve an equal proportion of debt,preferred stock,and common equity. 
C) minimize the firm's composite cost of capital. 
D) maximize total leverage. 
A) minimize the use of debt. 
B) achieve an equal proportion of debt,preferred stock,and common equity. 
C) minimize the firm's composite cost of capital. 
D) maximize total leverage.

Question 10

Which of the following statements about operating leverage is true?

Accepted Answer

A) Operating leverage reduces a firm's risk. 
B) Operating leverage is the responsiveness of the firm's EBIT to fluctuations in sales. 
C) Operating leverage involves the usage of fixed cost financial securities in the operation of a business. 
D) Operating leverage is the responsiveness of the firm's EPS to fluctuations in sales. 
A) Operating leverage reduces a firm's risk. 
B) Operating leverage is the responsiveness of the firm's EBIT to fluctuations in sales. 
C) Operating leverage involves the usage of fixed cost financial securities in the operation of a business. 
D) Operating leverage is the responsiveness of the firm's EPS to fluctuations in sales.

Question 11

Above the EBIT-EPS indifference point a more heavily levered financial plan will produce greater EPS.

Accepted Answer

A) True 
 B)False

Question 12

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.

Accepted Answer

A) True 
 B)False

Question 13

Operating leverage refers to

Accepted Answer

A) financing a portion of the firm's assets with securities bearing a fixed rate of return. 
B) the additional chance of insolvency borne by the common shareholder. 
C) the incurrence of fixed operating costs in the firm's income stream. 
D) a high degree of variable costs of production. 
A) financing a portion of the firm's assets with securities bearing a fixed rate of return. 
B) the additional chance of insolvency borne by the common shareholder. 
C) the incurrence of fixed operating costs in the firm's income stream. 
D) a high degree of variable costs of production.

Question 14

The optimal capital structure occurs when operating leverage equals financial leverage.

Accepted Answer

A) True 
 B)False

Question 15

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 16

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?

Accepted Answer

Step 1 Compute the percent level of brea

Question 17

Which of the following statements about financial leverage is true?

Accepted Answer

A) Financial leverage is the responsiveness of the firm's EBIT to fluctuations in sales. 
B) Financial leverage involves the incurrence of fixed operating costs in the firm's income stream. 
C) Financial leverage is the responsiveness of the firm's EPS to fluctuations in EBIT. 
D) Financial leverage reduces a firm's risk. 
A) Financial leverage is the responsiveness of the firm's EBIT to fluctuations in sales. 
B) Financial leverage involves the incurrence of fixed operating costs in the firm's income stream. 
C) Financial leverage is the responsiveness of the firm's EPS to fluctuations in EBIT. 
D) Financial leverage reduces a firm's risk.

Question 18

Welker Products sells small kitchen gadgets for $15 each.The gadgets have a variable cost of $4 per unit,and Welker Products' fixed operating costs are $220,000 per year.Welker Products' capital structure includes 55% debt and 45% equity.Annual interest expense is $25,000,and the corporate tax rate is 35%. 
a.Calculate the break-even point in units. 
b.If Welker Products sells 25,000 units,calculate the firm's EBIT and net income. 
c.If sales increase ten percent from 25,000 units to 30,000 units,estimate the firm's expected EBIT and net income. 
d.Does Kelly Products use operating leverage and/or financial leverage? Explain.

Accepted Answer

a.Break-even = ($220,000/($15 - $4))= 20

Question 19

As production levels increase

Accepted Answer

A) variable costs per unit decrease. 
B) fixed costs per unit increase. 
C) fixed costs per unit stay the same and variable costs per unit increase. 
D) fixed costs per unit decrease and variable costs per unit stay the same. 
A) variable costs per unit decrease. 
B) fixed costs per unit increase. 
C) fixed costs per unit stay the same and variable costs per unit increase. 
D) fixed costs per unit decrease and variable costs per unit stay the same.

Question 20

JKE,Inc.has a break even sales level of $10,000,000 and has fixed costs of $4,000,000 per year.The selling price per unit is $200.What is the variable cost per unit?

Accepted Answer

At break-even S-VC = FC $10,00

The primary weakness of EBIT-EPS analysis is that

Corporations utilize external financing either because they do not have sufficient earnings to reinvest or they want to rebalance their capital structures.

Break-even analysis assumes that a multiproduct firm maintains a constant production and sales mix.

A firm's optimal capital structure occurs where?

Financial leverage could mean financing some of a firm's assets with

A company that sells preferred stock and uses the money to pay off a loan is decreasing its amount of financial leverage.

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?

Because fixed costs do not vary with a firm's revenues,firm's with high levels of fixed cost enjoy lower levels of operating risk because their costs are more certain,making budgeting easier.

The optimal capital structure is the funds mix that will

Which of the following statements about operating leverage is true?

Above the EBIT-EPS indifference point a more heavily levered financial plan will produce greater EPS.

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.

Operating leverage refers to

The optimal capital structure occurs when operating leverage equals financial leverage.

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

Which of the following statements about financial leverage is true?

As production levels increase

JKE,Inc.has a break even sales level of $10,000,000 and has fixed costs of $4,000,000 per year.The selling price per unit is $200.What is the variable cost per unit?

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

The primary weakness of EBIT-EPS analysis is that

Corporations utilize external financing either because they do not have sufficient earnings to reinvest or they want to rebalance their capital structures.

Break-even analysis assumes that a multiproduct firm maintains a constant production and sales mix.

A firm's optimal capital structure occurs where?

Financial leverage could mean financing some of a firm's assets with

A company that sells preferred stock and uses the money to pay off a loan is decreasing its amount of financial leverage.

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?

Because fixed costs do not vary with a firm's revenues,firm's with high levels of fixed cost enjoy lower levels of operating risk because their costs are more certain,making budgeting easier.

The optimal capital structure is the funds mix that will

Which of the following statements about operating leverage is true?

Above the EBIT-EPS indifference point a more heavily levered financial plan will produce greater EPS.

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.

Operating leverage refers to

The optimal capital structure occurs when operating leverage equals financial leverage.

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

Which of the following statements about financial leverage is true?

As production levels increase

JKE,Inc.has a break even sales level of $10,000,000 and has fixed costs of $4,000,000 per year.The selling price per unit is $200.What is the variable cost per unit?

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