Exam 12: Determining the Financing Mix

A company that sells common stock and uses the money to pay off a loan is increasing its use of financial leverage.

Borrowing funds using short-term debt,such as commercial paper,and using the proceeds to invest in long-term investments,creates a re-financing risk that can force firm's to sell assets at distressed prices if financing becomes unavailable.

A corporation reports sales of $4,000,000,variable costs of $500,000,fixed operating costs of $1,250,000,and interest expense of $350,000.The corporation's EBIT is $3,250,000 and its marginal tax rate is 30%.If the corporation is able to increase its sales by 25%,then

Debt capacity is the maximum proportion of debt the firm can include in its capital structure and still maintain its lowest composite cost of capital.

Basic tools of capital-structure management include

JKE,Inc.has a break even sales level of $10,000,000 and has fixed costs of $4,000,000 per year.The selling price per unit is $200.What is the variable cost per unit?

The control hypothesis suggests that shareholders prefer an increase in the firm's debt in order to reduce the agency costs associated with excessive free cash flow.

Business risk refers to the relative dispersion (variability)of a company's net income.

The break-even point in sales dollars is convenient if

Operating leverage has to do with

Because financial markets can be extremely volatile,with bond and stock prices changing significantly from day to day,a firm's management has much greater control over the firm's operating leverage than over its financial leverage.