Question 1

According to the moderate view of capital structure theory,the cost of common equity is constant regardless of the debt financing level.

Accepted Answer

A) True 
 B)False

Question 2

The break-even quantity of output is that quantity of output,in units,that results in an EBIT equal to zero.

Accepted Answer

A) True 
 B)False

Question 3

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 4

Young Enterprises is financed entirely with 3 million shares of common stock selling for $20 a share.Capital of $4 million is needed for this year's capital budget.Additional funds can be raised with new stock (ignore dilution)or with 13 percent 10-year bonds.Young's tax rate is 40 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.(EBIT - 0)(1 - 0.4)/3,200,000 = (EBIT

Question 5

Operating leverage means financing a portion of a firm's earnings per share with debt.

Accepted Answer

A) True 
 B)False

Question 6

If a firm has no operating leverage and no financial leverage,then a 10% increase in sales will have what effect on EPS?

Accepted Answer

A)  EPS will remain the same 
B)  EPS will increase by 10% 
C)  EPS will decrease by 10% 
D)  EPS will increase by less than 10% 
A)  EPS will remain the same 
B)  EPS will increase by 10% 
C)  EPS will decrease by 10% 
D)  EPS will increase by less than 10%

Question 7

Operating leverage is the responsiveness of a firm's EBIT to changes in sales revenues.

Accepted Answer

A) True 
 B)False

Question 8

Capital structure is equal to financial structure minus current liabilities.

Accepted Answer

A) True 
 B)False

Question 9

Financing a portion of a firm's assets with securities bearing a fixed rate of return in hopes of increasing the return to stockholders refers to

Accepted Answer

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

Question 10

Break-even analysis ignores fixed costs because fixed costs do not change.

Accepted Answer

A) True 
 B)False

Question 11

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

Question 12

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

Accepted Answer

A)  If a firm employs both operating and financial leverage, any percent change in sales will produce a larger percent change in earnings per share. 
B)  A firm that is in a capital-intensive industry should use a higher level of financial leverage than a firm that employs low levels of operating leverage. 
C)  Usage of both operating and financial leverage reduces a firm's risk. 
D)  High operating leverage and high financial leverage offset one another, meaning that if sales increase by 10%, then EPS will also increase by 10%. 
A)  If a firm employs both operating and financial leverage, any percent change in sales will produce a larger percent change in earnings per share. 
B)  A firm that is in a capital-intensive industry should use a higher level of financial leverage than a firm that employs low levels of operating leverage. 
C)  Usage of both operating and financial leverage reduces a firm's risk. 
D)  High operating leverage and high financial leverage offset one another, meaning that if sales increase by 10%, then EPS will also increase by 10%.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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 15

The three major components responsible for variation in a company's income stream are business risk,operating risk,and financial risk.

Accepted Answer

A) True 
 B)False

Question 16

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 17

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 no matter what the production level for the year.This is an example of a

Accepted Answer

A)  variable cost. 
B)  fixed cost. 
C)  semivariable cost. 
D)  semifixed cost. 
A)  variable cost. 
B)  fixed cost. 
C)  semivariable cost. 
D)  semifixed cost.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Business risk refers to the relative dispersion of a firm's earnings before interest and taxes.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

According to the moderate view of capital structure theory,the cost of common equity is constant regardless of the debt financing level.

The break-even quantity of output is that quantity of output,in units,that results in an EBIT equal to zero.

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

Operating leverage means financing a portion of a firm's earnings per share with debt.

If a firm has no operating leverage and no financial leverage,then a 10% increase in sales will have what effect on EPS?

Operating leverage is the responsiveness of a firm's EBIT to changes in sales revenues.

Capital structure is equal to financial structure minus current liabilities.

Financing a portion of a firm's assets with securities bearing a fixed rate of return in hopes of increasing the return to stockholders refers to

Break-even analysis ignores fixed costs because fixed costs do not change.

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

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

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

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.

The three major components responsible for variation in a company's income stream are business risk,operating risk,and financial risk.

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

Business risk refers to the relative dispersion of a firm's earnings before interest and taxes.

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

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

According to the moderate view of capital structure theory,the cost of common equity is constant regardless of the debt financing level.

The break-even quantity of output is that quantity of output,in units,that results in an EBIT equal to zero.

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

Operating leverage means financing a portion of a firm's earnings per share with debt.

If a firm has no operating leverage and no financial leverage,then a 10% increase in sales will have what effect on EPS?

Operating leverage is the responsiveness of a firm's EBIT to changes in sales revenues.

Capital structure is equal to financial structure minus current liabilities.

Financing a portion of a firm's assets with securities bearing a fixed rate of return in hopes of increasing the return to stockholders refers to

Break-even analysis ignores fixed costs because fixed costs do not change.

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

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

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

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.

The three major components responsible for variation in a company's income stream are business risk,operating risk,and financial risk.

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

Business risk refers to the relative dispersion of a firm's earnings before interest and taxes.

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

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