Exam 12: Determining the Financing Mix

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

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

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.

Kohler Manufacturing typically achieves one of three production levels in any given year: 8 million pounds of steel,10 million pounds of steel,or 16 million pounds of steel.In tracking some of its costs,Kohler's controller discovered one cost that was $10 per pound at a production level of 8 million pounds,$8 per pound at a production level of 10 million pounds,and $5 per pound at a production level of 16 million pounds.This is an example of a

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

All of the following will make the break-even point increase,other things equal,EXCEPT

A Bristal Boats,Inc.reports sales of $4,000,000,variable costs of $500,000,fixed operating costs of $1,250,000,and interest expense of $350,000.The corporation's EBIT is $3,250,000 and its marginal tax rate is 30%.If the corporation is able to increase its sales by 25%,then

One component of a firm's financial structure which is NOT a component of its capital structure is

The MAX Corporation is planning a $4,000,000 expansion this year.The expansion can be financed by issuing either common stock or bonds.The new common stock can be sold for $60 per share.The bonds can be issued with a 12 percent coupon rate.The firm's existing shares of preferred stock pay dividends of $2.00 per share.The company's corporate income tax rate is 46 percent.The company's balance sheet prior to expansion is as follows: MAX Corporation a.Calculate the indifference level of EBIT between the two plans. b.If EBIT is expected to be $3 million,which plan will result in higher EPS?

Basic tools of capital-structure management include

Because financial markets can be extremely volatile,with bond and stock prices changing significantly from day to day,a firm's management has much greater control over the firm's operating leverage than over its financial leverage.

Operating leverage is measured as the responsiveness of the firm's earnings before interest and taxes relative to fluctuations in sales.

Capital structure is the mix of the long-term sources of funds used by the firm.

A key tool for evaluating business risk is break-even analysis.

According to the moderate view of capital costs and financial leverage,as the use of debt financing increases

One danger of EBIT-EPS analysis is that it ignores the implicit cost of debt financing.

If a firm's production process requires high operating leverage (use of fixed costs),then the firm should finance its assets with debt,so that the cost of capital will be reduced and financing costs will remain fixed.

The market value of a leveraged firm is equal to the market value of an unleveraged firm

The break-even point in sales dollars is convenient if

Which of the following statements about combined (operating & financial)leverage is true?