Exam 12: Determining the Financing Mix

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

Bob's Baked Goods Company reported the following income statement for 2009: If Bob's sales next year increase by 20%,what will Bob's earnings per share be?

As the volume of production increases the variable cost-per unit of the product decreases.

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?

Joe's Furniture Co.produces inexpensive leather chairs.The average selling price for one of the chairs is $400.The variable cost per chair is $250.Benny's 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?

Corporations that are heavily committed to investments in fixed assets that are expected to produce cash flow over many years generally favor long-term debt to the extent that they borrow.

Which of the following would be considered a fixed cost in a manufacturing setting?

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.

Moline Manufacturing Corporation reported the following items: Sales = $6,000,000; Variable Costs of Production = $1,500,000; Variable Selling and Administrative Expenses = $550,000; Fixed Costs = $1,350,000; EBIT = $2,600,000; and the Marginal Tax Rate =35%.Moline's break-even point in sales dollars is

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

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?

Operating leverage is easier to control and manage than financial leverage because operating leverage deals with the internal workings of the company while financing deals with outside parties.

Roberts,Inc.is trying to decide how best to finance a proposed $10,000,000 capital investment.Under Plan I,the project will be financed entirely with long-term 9 percent bonds.The firm currently has no debt or preferred stock.Under Plan II,common stock will be sold to net the firm $20 a share; presently,1,000,000 shares are outstanding.The corporate tax rate for Roberts is 40 percent. a.Calculate the indifference level of EBIT associated with the two financing plans. b.Prepare an EBIT-EPS analysis chart,showing the intersection of the two financing plan lines. c.Which financing plan would you expect to cause the greatest change in EPS relative to a change in EBIT? Why? d.If EBIT is expected to be $3.1 million,which plan will result in a higher EPS?

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.

Kocher Steel 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,Kocher Steel'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

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

Bob's Baked Goods Company reported the following income statement for 2009: If Bob's sales next year increase by 20%,Bob's EBIT will increase:

The EBIT-EPS indifference point is the level of production at which the company's EBIT equals its EPS.

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.

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