Exam 12: Determining the Financing Mix

A firm's optimal capital structure occurs where?

Benkart's Tire Store has fixed costs of $220,000.Tires sell for $95 each and have a unit variable cost of $45.What is Benkart's break-even point in units?

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

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?

As production levels increase,fixed costs stay the same in total,but decrease on a per unit basis.

Companies that sell basic necessities face the highest levels of business risk because consumers will price shop aggressively for items they purchase on a regular basis.

Abrams Steel Company has very high operating leverage due to the capital intensive nature of the steel business.Abrams' CEO is concerned about the variability in the firm's EPS if sales should drop,and decides to take action.Which of the following will reduce the variability in the firm's EPS for a given change in sales?

If a company sells bonds and uses the proceeds to buy back common stock,the company's financial leverage with increase.

The "threat hypothesis"

The EBIT-EPS indifference point

Which of the following statements is most correct concerning a corporation's optimal capital structure?

Fixed operating costs include charges incurred from the firm's use of debt financing.

Sweet Tooth Bakery bakes and sells pies.Sweet Tooth 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 pies?

Financial structure includes long- and short-term sources of funds.

A decrease in the level of production results in decreased fixed cost per unit.

Operating leverage refers to

Jones Blanket Company sells blankets for $25 each.The variable cost of each blanket is $10.If fixed cost is $4,500,000 then the break-even point is 300,000 units.

The four basic determinants of business risk include all of the following except:

DXZ,Inc.currently produces one product which sells for $250 per unit.The company's fixed costs are $75,000 per year; variable costs are $205 per unit.A salesman has offered to sell the company a new piece of equipment which will increase fixed costs to $100,000.The salesman claims that the company's break-even point will not be altered if the company purchases this equipment.What will be the company's new variable cost per unit?

A corporation's debt capacity is the maximum proportion of debt that the corporation can include in its capital structure and still maintain its lowest composite cost of capital.