Question 1

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

Accepted Answer

A)  A mortgage loan is obtained and the proceeds are used to pay off existing short-term debt. 
B)  Preferred stock is sold and the proceeds are used to pay off existing short-term debt. 
C)  Common stock is sold and the proceeds are used to pay off existing short-term debt. 
D)  Short-term debt is obtained to get the company through a period of negative net income and cash flow. 
A)  A mortgage loan is obtained and the proceeds are used to pay off existing short-term debt. 
B)  Preferred stock is sold and the proceeds are used to pay off existing short-term debt. 
C)  Common stock is sold and the proceeds are used to pay off existing short-term debt. 
D)  Short-term debt is obtained to get the company through a period of negative net income and cash flow.

Question 2

Based on the data contained in Table A,what is the break-even point in units produced and sold?
TABLE A

Accepted Answer

A)  130,000 
B)  140,000 
C)  150,000 
D)  180,000 
A)  130,000 
B)  140,000 
C)  150,000 
D)  180,000

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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 5

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

Accepted Answer

A)  Rent 
B)  Administrative salaries 
C)  Insurance 
D)  Direct labor 
A)  Rent 
B)  Administrative salaries 
C)  Insurance 
D)  Direct labor

Question 6

The independence hypothesis allows for bankruptcy and agency costs.

Accepted Answer

A) True 
 B)False

Question 7

Based on the data contained in Table A,what is the break-even point in sales dollars?
TABLE A

Accepted Answer

A)  $2,340,000 
B)  $1,850,000 
C)  $1,775,500 
D)  $700,000 
A)  $2,340,000 
B)  $1,850,000 
C)  $1,775,500 
D)  $700,000

Question 8

Over the relevant range of output,fixed costs remain unchanged.

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

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.

Accepted Answer

a.
 @#IMG-DLM& EBIT

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

Break-even analysis is used to study the effect on EBIT of changes in all of the following except:

Accepted Answer

A)  corporate taxes. 
B)  prices. 
C)  cost structure. 
D)  volume. 
A)  corporate taxes. 
B)  prices. 
C)  cost structure. 
D)  volume.

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is a fixed cost?

Accepted Answer

A)  insurance 
B)  direct material 
C)  direct labor 
D)  freight costs on products 
A)  insurance 
B)  direct material 
C)  direct labor 
D)  freight costs on products

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

Ames Drilling Corp.reported that its sales and EBIT increased by 10%,but its EPS increased by 30%.The much larger change in earnings per share could be the result of

Accepted Answer

A)  high operating leverage. 
B)  high financial leverage. 
C)  a high percentage of credit sale collections from prior years. 
D)  high fixed costs of production. 
A)  high operating leverage. 
B)  high financial leverage. 
C)  a high percentage of credit sale collections from prior years. 
D)  high fixed costs of production.

Question 18

Variation in a company's income stream results from its choice of business line,its choice of an operating cost structure,and its choice of a capital structure.

Accepted Answer

A) True 
 B)False

Question 19

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 20

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

Accepted Answer

A) True 
 B)False

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

Based on the data contained in Table A,what is the break-even point in units produced and sold? TABLE A

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

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

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

The independence hypothesis allows for bankruptcy and agency costs.

Based on the data contained in Table A,what is the break-even point in sales dollars? TABLE A

Over the relevant range of output,fixed costs remain unchanged.

The optimal capital structure is the funds mix that will

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

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

Break-even analysis is used to study the effect on EBIT of changes in all of the following except:

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

Which of the following is a fixed cost?

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

Ames Drilling Corp.reported that its sales and EBIT increased by 10%,but its EPS increased by 30%.The much larger change in earnings per share could be the result of

Variation in a company's income stream results from its choice of business line,its choice of an operating cost structure,and its choice of a capital structure.

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

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

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

Current Asset Management

International Business Finance

Filters

Exam 12: Determining the Financing Mix

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

Based on the data contained in Table A,what is the break-even point in units produced and sold? TABLE A

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

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

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

The independence hypothesis allows for bankruptcy and agency costs.

Based on the data contained in Table A,what is the break-even point in sales dollars? TABLE A

Over the relevant range of output,fixed costs remain unchanged.

The optimal capital structure is the funds mix that will

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

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

Break-even analysis is used to study the effect on EBIT of changes in all of the following except:

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

Which of the following is a fixed cost?

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

Ames Drilling Corp.reported that its sales and EBIT increased by 10%,but its EPS increased by 30%.The much larger change in earnings per share could be the result of

Variation in a company's income stream results from its choice of business line,its choice of an operating cost structure,and its choice of a capital structure.

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

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

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

Current Asset Management

International Business Finance

Filters