Question 1

Financial leverage could mean financing some of a firm's assets with

Accepted Answer

A)  preferred stock. 
B)  retained earnings. 
C)  private equity capital. 
D)  sales revenues. 
A)  preferred stock. 
B)  retained earnings. 
C)  private equity capital. 
D)  sales revenues.

Question 2

A plant may remain operating when sales are depressed

Accepted Answer

A)  if the selling price per unit exceeds the variable cost per unit. 
B)  to help the local economy. 
C)  in an effort to cover at least some of the variable cost. 
D)  unless variable costs are zero when production is zero. 
A)  if the selling price per unit exceeds the variable cost per unit. 
B)  to help the local economy. 
C)  in an effort to cover at least some of the variable cost. 
D)  unless variable costs are zero when production is zero.

Question 3

Stan's Cans,Inc.expects to earn $150,000 next year after taxes on sales of $2,200,000.Stan's manufactures only one size of garbage can.Stan sells his cans for $8 apiece and they have a variable cost of $2.40 apiece.Stan's tax rate is currently 34%.
a.What are the firm's expected fixed costs for next year?
b.What is the break-even point in units?

Accepted Answer

a.([P × Q] - [(V × Q)+ F])(1 -

Question 4

Which of the following would be considered the firm's optimal capital structure?

Accepted Answer

A)  Stock Price = $25, Earnings Per Share = $10, Cost of Equity Capital = 15% 
B)  Stock Price = $23, Earnings Per Share = $11, Cost of Equity Capital = 18% 
C)  Stock Price = $24, Earnings Per Share = $12, Cost of Equity Capital = 17% 
D)  Stock Price = $20, Earnings Per Share = $12, Cost of Equity Capital = 20% 
A)  Stock Price = $25, Earnings Per Share = $10, Cost of Equity Capital = 15% 
B)  Stock Price = $23, Earnings Per Share = $11, Cost of Equity Capital = 18% 
C)  Stock Price = $24, Earnings Per Share = $12, Cost of Equity Capital = 17% 
D)  Stock Price = $20, Earnings Per Share = $12, Cost of Equity Capital = 20%

Question 5

The moderate view of capital structure theory allows for the tax-deductibility of interest expense.

Accepted Answer

A) True 
 B)False

Question 6

Break-even analysis assumes that a multiproduct firm maintains a constant production and sales mix.

Accepted Answer

A) True 
 B)False

Question 7

Variable costs include all of the following except:

Accepted Answer

A)  property taxes. 
B)  direct labor. 
C)  sales commissions. 
D)  annual rent. 
A)  property taxes. 
B)  direct labor. 
C)  sales commissions. 
D)  annual rent.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

All of the following are likely to result in the use of less debt in a company's capital structure except:

Accepted Answer

A)  desire to maintain financial flexibility. 
B)  desire to maintain a high credit rating. 
C)  insufficient internal funds. 
D)  a decrease in a company's marginal tax rate. 
A)  desire to maintain financial flexibility. 
B)  desire to maintain a high credit rating. 
C)  insufficient internal funds. 
D)  a decrease in a company's marginal tax rate.

Question 10

If we ignore bankruptcy and agency costs then the optimal capital structure for a firm under the moderate view would be 100% debt.

Accepted Answer

A) True 
 B)False

Question 11

The primary weakness of EBIT-EPS analysis is that

Accepted Answer

A)  it ignores the implicit cost of debt financing. 
B)  it double counts the cost of debt financing. 
C)  it applies only to firms with large amounts of debt in their capital structure. 
D)  it may only be used by firms that are profitable this year. 
A)  it ignores the implicit cost of debt financing. 
B)  it double counts the cost of debt financing. 
C)  it applies only to firms with large amounts of debt in their capital structure. 
D)  it may only be used by firms that are profitable this year.

Question 12

Which of the following statements about operating leverage is true?

Accepted Answer

A)  Operating leverage reduces a firm's risk. 
B)  Operating leverage is the responsiveness of the firm's EBIT to fluctuations in sales. 
C)  Operating leverage involves the usage of fixed cost financial securities in the operation of a business. 
D)  Operating leverage is the responsiveness of the firm's EPS to fluctuations in sales. 
A)  Operating leverage reduces a firm's risk. 
B)  Operating leverage is the responsiveness of the firm's EBIT to fluctuations in sales. 
C)  Operating leverage involves the usage of fixed cost financial securities in the operation of a business. 
D)  Operating leverage is the responsiveness of the firm's EPS to fluctuations in sales.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements about financial leverage is true?

Accepted Answer

A)  Financial leverage is the responsiveness of the firm's EBIT to fluctuations in sales. 
B)  Financial leverage involves the incurrence of fixed operating costs in the firm's income stream. 
C)  Financial leverage is the responsiveness of the firm's EPS to fluctuations in EBIT. 
D)  Financial leverage reduces a firm's risk. 
A)  Financial leverage is the responsiveness of the firm's EBIT to fluctuations in sales. 
B)  Financial leverage involves the incurrence of fixed operating costs in the firm's income stream. 
C)  Financial leverage is the responsiveness of the firm's EPS to fluctuations in EBIT. 
D)  Financial leverage reduces a firm's risk.

Question 15

If sales double,the break-even model assumes that total variable costs will double.

Accepted Answer

A) True 
 B)False

Question 16

Assuming no corporate taxes,the independence hypothesis suggests that a firm's weighted average cost of capital will

Accepted Answer

A)  remain constant regardless of capital structure because the cost of debt and the cost of equity are the same. 
B)  remain constant because the cost of equity will be increasing as the amount of debt increases due to the increased risk. 
C)  increase proportionally with the increase in the amount of debt a firm uses. 
D)  decrease proportionally with the increase in the amount of debt a firm uses. 
A)  remain constant regardless of capital structure because the cost of debt and the cost of equity are the same. 
B)  remain constant because the cost of equity will be increasing as the amount of debt increases due to the increased risk. 
C)  increase proportionally with the increase in the amount of debt a firm uses. 
D)  decrease proportionally with the increase in the amount of debt a firm uses.

Question 17

Financial risk applies to both the additional variability in earnings available to common shareholders and the additional chance of insolvency caused by the use of financial leverage.

Accepted Answer

A) True 
 B)False

Question 18

An EBIT-EPS analysis allows the decision maker to visualize the impact of different financing plans on EPS over a range of EBIT levels.

Accepted Answer

A) True 
 B)False

Question 19

The optimal capital structure occurs when operating leverage equals financial leverage.

Accepted Answer

A) True 
 B)False

Question 20

Sunshine Candy Company's capital structure for the past year of operation is shown below.
   The federal tax rate is 50 percent.Sunshine Candy Company,home-based in Orlando,wants to raise an additional $1,000,000 to open new facilities in Tampa and Miami.The firm can accomplish this via two alternatives:
 (1)It can sell a new issue of 20-year debentures with 16 percent interest; or (2)20,000 new shares of common stock can be sold to the public to net the candy company $50 per share.A recent study,performed by an outside consulting organization,projected Sunshine Candy Company's long-term EBIT level at approximately $6,800,000.Find the indifference level of EBIT (with regard to earnings per share)between the suggested financing plans.

Accepted Answer

@#IMG-DLM& 50 EBIT - 23,250,00

Financial leverage could mean financing some of a firm's assets with

A plant may remain operating when sales are depressed

Which of the following would be considered the firm's optimal capital structure?

The moderate view of capital structure theory allows for the tax-deductibility of interest expense.

Break-even analysis assumes that a multiproduct firm maintains a constant production and sales mix.

Variable costs include all of the following except:

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

All of the following are likely to result in the use of less debt in a company's capital structure except:

If we ignore bankruptcy and agency costs then the optimal capital structure for a firm under the moderate view would be 100% debt.

The primary weakness of EBIT-EPS analysis is that

Which of the following statements about operating leverage is true?

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

Which of the following statements about financial leverage is true?

If sales double,the break-even model assumes that total variable costs will double.

Assuming no corporate taxes,the independence hypothesis suggests that a firm's weighted average cost of capital will

Financial risk applies to both the additional variability in earnings available to common shareholders and the additional chance of insolvency caused by the use of financial leverage.

An EBIT-EPS analysis allows the decision maker to visualize the impact of different financing plans on EPS over a range of EBIT levels.

The optimal capital structure occurs when operating leverage equals financial leverage.

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

Financial leverage could mean financing some of a firm's assets with

A plant may remain operating when sales are depressed

Which of the following would be considered the firm's optimal capital structure?

The moderate view of capital structure theory allows for the tax-deductibility of interest expense.

Break-even analysis assumes that a multiproduct firm maintains a constant production and sales mix.

Variable costs include all of the following except:

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

All of the following are likely to result in the use of less debt in a company's capital structure except:

If we ignore bankruptcy and agency costs then the optimal capital structure for a firm under the moderate view would be 100% debt.

The primary weakness of EBIT-EPS analysis is that

Which of the following statements about operating leverage is true?

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

Which of the following statements about financial leverage is true?

If sales double,the break-even model assumes that total variable costs will double.

Assuming no corporate taxes,the independence hypothesis suggests that a firm's weighted average cost of capital will

Financial risk applies to both the additional variability in earnings available to common shareholders and the additional chance of insolvency caused by the use of financial leverage.

An EBIT-EPS analysis allows the decision maker to visualize the impact of different financing plans on EPS over a range of EBIT levels.

The optimal capital structure occurs when operating leverage equals financial leverage.

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