Question 1

Operating leverage contributes ultimately to the variability of a firm's earnings per share.

Accepted Answer

A) True 
 B)False

Question 2

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. a.Calculate the financing plan's EBIT indifference point.
b.	The expected level of EBIT is $10,320,000 with a standard deviation of $2,000,000. What is the probability that EBIT will be above the indifference point?
c.	Does the "indifference point" calculated in question (a) above truly represent a point where stockholders are indifferent between stock and debt financing? Explain your answer.

Accepted Answer

a. @#IMG-DLM& EBIT = $17,600,000 is the

Question 3

The Modigliani and Miller hypothesis does NOT work in the "real world" because

Accepted Answer

A) interest expense is tax deductible,providing an advantage to debt financing. 
B) higher levels of debt increase the likelihood of bankruptcy,and bankruptcy has real costs for any corporation. 
C) both A and B. 
D) dividend payments are fixed and tax deductible for the corporation. 
A) interest expense is tax deductible,providing an advantage to debt financing. 
B) higher levels of debt increase the likelihood of bankruptcy,and bankruptcy has real costs for any corporation. 
C) both A and B. 
D) dividend payments are fixed and tax deductible for the corporation.

Question 4

The implicit cost of debt takes into consideration the change in the cost of common equity brought on by using additional debt.

Accepted Answer

A) True 
 B)False

Question 5

Assuming no corporate taxes,the independence hypothesis suggests that a firm's weighted average cost of capital will

Accepted Answer

A) remain constant regardless of capital structure because the cost of debt and the cost of equity are the same. 
B) remain constant because the cost of equity will be increasing as the amount of debt increases due to the increased risk. 
C) increase proportionally with the increase in the amount of debt a firm uses. 
D) decrease proportionally with the increase in the amount of debt a firm uses. 
A) remain constant regardless of capital structure because the cost of debt and the cost of equity are the same. 
B) remain constant because the cost of equity will be increasing as the amount of debt increases due to the increased risk. 
C) increase proportionally with the increase in the amount of debt a firm uses. 
D) decrease proportionally with the increase in the amount of debt a firm uses.

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

Which of the following would NOT be a part of a firm's capital structure?

Accepted Answer

A) short-term notes payable 
B) long-term bonds 
C) preferred stock 
D) common stock 
A) short-term notes payable 
B) long-term bonds 
C) preferred stock 
D) common stock

Question 8

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?

Accepted Answer

a.Q_BE= $450,000/($400-

Question 9

An EBIT-EPS analysis allows the decision maker to visualize the impact of different financing plans on EPS over a range of EBIT levels.

Accepted Answer

A) True 
 B)False

Question 10

When using an EPS-EBIT chart to evaluate a pure debt financing and pure equity financing plan

Accepted Answer

A) the debt financing plan line will graph with a steeper slope than the equity financing plan line. 
B) the debt financing plan line will have a lower level of EBIT at EPS = 0. 
C) the line of the two financing plans will intersect on the EBIT axis. 
D) the slope of the equity financing plan line will be steeper than the debt financing plan line below the intersection of the two lines. 
A) the debt financing plan line will graph with a steeper slope than the equity financing plan line. 
B) the debt financing plan line will have a lower level of EBIT at EPS = 0. 
C) the line of the two financing plans will intersect on the EBIT axis. 
D) the slope of the equity financing plan line will be steeper than the debt financing plan line below the intersection of the two lines.

Question 11

Higher bankruptcy costs will result in optimal capital structures using more long-term debt financing.

Accepted Answer

A) True 
 B)False

Question 12

The independence hypothesis suggests that the total market value of the firm's outstanding securities is unaffected by its capital structure.

Accepted Answer

A) True 
 B)False

Question 13

The tax shield on interest is calculated by multiplying the interest rate paid on debt by the principal amount of the debt and the firm's marginal tax rate.

Accepted Answer

A) True 
 B)False

Question 14

A firm's cost of capital is not affected by the composition of the right-hand side of the firm's balance sheet,but rather is determined by the firm's mix of assets.

Accepted Answer

A) True 
 B)False

Question 15

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 16

If fixed costs are $150,000,price per unit is $10,and variable cost per unit is $4,the break-even point is 15,000 units.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

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

Question 18

The following information pertains to the Classic Burger Restaurant chain:   
a.If sales increase by 10%,what will be the new level of EPS if the firm has 100,000 shares outstanding? 
b.What is the percentage increase in EPS? Explain the difference between the percentage increase in sales and the percentage increase in EPS.

Accepted Answer

a. @#IMG-DLM& 
b.($12.60 - $10.50)/$10.50 = .20 or

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Given taxes and bankruptcy costs exist,as financial increases,the weighted average cost of capital first decreases and then increases.

Accepted Answer

A) True 
 B)False

Operating leverage contributes ultimately to the variability of a firm's earnings per share.

The Modigliani and Miller hypothesis does NOT work in the "real world" because

The implicit cost of debt takes into consideration the change in the cost of common equity brought on by using additional debt.

Assuming no corporate taxes,the independence hypothesis suggests that a firm's weighted average cost of capital will

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

Which of the following would NOT be a part of a firm's capital structure?

An EBIT-EPS analysis allows the decision maker to visualize the impact of different financing plans on EPS over a range of EBIT levels.

When using an EPS-EBIT chart to evaluate a pure debt financing and pure equity financing plan

Higher bankruptcy costs will result in optimal capital structures using more long-term debt financing.

The independence hypothesis suggests that the total market value of the firm's outstanding securities is unaffected by its capital structure.

The tax shield on interest is calculated by multiplying the interest rate paid on debt by the principal amount of the debt and the firm's marginal tax rate.

A firm's cost of capital is not affected by the composition of the right-hand side of the firm's balance sheet,but rather is determined by the firm's mix of assets.

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?

If fixed costs are $150,000,price per unit is $10,and variable cost per unit is $4,the break-even point is 15,000 units.

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

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

Given taxes and bankruptcy costs exist,as financial increases,the weighted average cost of capital first decreases and then increases.

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

Exam 12: Determining the Financing Mix

Operating leverage contributes ultimately to the variability of a firm's earnings per share.

The Modigliani and Miller hypothesis does NOT work in the "real world" because

The implicit cost of debt takes into consideration the change in the cost of common equity brought on by using additional debt.

Assuming no corporate taxes,the independence hypothesis suggests that a firm's weighted average cost of capital will

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

Which of the following would NOT be a part of a firm's capital structure?

An EBIT-EPS analysis allows the decision maker to visualize the impact of different financing plans on EPS over a range of EBIT levels.

When using an EPS-EBIT chart to evaluate a pure debt financing and pure equity financing plan

Higher bankruptcy costs will result in optimal capital structures using more long-term debt financing.

The independence hypothesis suggests that the total market value of the firm's outstanding securities is unaffected by its capital structure.

The tax shield on interest is calculated by multiplying the interest rate paid on debt by the principal amount of the debt and the firm's marginal tax rate.

A firm's cost of capital is not affected by the composition of the right-hand side of the firm's balance sheet,but rather is determined by the firm's mix of assets.

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?

If fixed costs are $150,000,price per unit is $10,and variable cost per unit is $4,the break-even point is 15,000 units.

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

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

Given taxes and bankruptcy costs exist,as financial increases,the weighted average cost of capital first decreases and then increases.

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