Question 1

With the existence of fixed operating costs, a decrease in sales will result in ________ in EBIT.

Accepted Answer

A)  a proportional increase 
B)  an equal increase 
C)  a less than proportional decrease 
D)  a more than proportional decrease 
A)  a proportional increase 
B)  an equal increase 
C)  a less than proportional decrease 
D)  a more than proportional decrease

Question 2

Operating leverage results from the existence of operating costs in a firm's income stream.

Accepted Answer

A) True 
 B)False

Question 3

The inexpensive nature of long-term debt in a firm's capital structure is due to the fact that ________.

Accepted Answer

A)  the debt holders are the true owners of the firm 
B)  equity capital has a fixed return 
C)  long-term debt has a fixed return and a maturity date 
D)  dividend payments are tax-deductible 
A)  the debt holders are the true owners of the firm 
B)  equity capital has a fixed return 
C)  long-term debt has a fixed return and a maturity date 
D)  dividend payments are tax-deductible

Question 4

________ refers to the effects that fixed costs have on the returns that shareholders earn.

Accepted Answer

A)  Purchase power parity 
B)  Leverage 
C)  Business risk 
D)  Pecking order theory 
A)  Purchase power parity 
B)  Leverage 
C)  Business risk 
D)  Pecking order theory

Question 5

Total leverage can be defined as the potential use of fixed costs, both operating and financial, to magnify the effect of changes in sales on a firm's earnings per share.

Accepted Answer

A) True 
 B)False

Question 6

Poor capital structure decisions can result in ________ the cost of capital, resulting in ________ acceptable investments.

Accepted Answer

A)  increasing; fewer 
B)  decreasing; more 
C)  increasing; more 
D)  decreasing; fewer 
A)  increasing; fewer 
B)  decreasing; more 
C)  increasing; more 
D)  decreasing; fewer

Question 7

An increase in fixed operating costs will result in ________.

Accepted Answer

A)  a decrease in the degree of operating leverage 
B)  an increase in the degree of operating leverage 
C)  a decrease in the degree of financial leverage 
D)  an increase in the degree of financial leverage 
A)  a decrease in the degree of operating leverage 
B)  an increase in the degree of operating leverage 
C)  a decrease in the degree of financial leverage 
D)  an increase in the degree of financial leverage

Question 8

Fixed financial charges include ________.

Accepted Answer

A)  common stock dividends and bond interest expense 
B)  common stock dividends and preferred stock dividends 
C)  bond interest expense and preferred stock dividends 
D)  stock repurchase expense 
A)  common stock dividends and bond interest expense 
B)  common stock dividends and preferred stock dividends 
C)  bond interest expense and preferred stock dividends 
D)  stock repurchase expense

Question 9

Frankline Coin, Inc. is considering two capital structures. The key information follows. Assume a 40 percent tax rate and expected EBIT of $50,000.   (a) Calculate two EBIT-EPS coordinates for each of the structures.
(b) Indicate over what EBIT range, if any, each structure is preferred.

Accepted Answer

(a) @#IMG-DLM& (b) Calculation of indifference poi

Question 10

Operating leverage is defined as the use of fixed operating costs to magnify the effects of changes in sales on a firm's earnings before interest and taxes.

Accepted Answer

A) True 
 B)False

Question 11

If a firm's sale price per unit decreases, the firm's ________.

Accepted Answer

A)  operating breakeven point will decrease 
B)  operating breakeven point will increase 
C)  variable costs per unit will decrease 
D)  variable costs per unit will increase 
A)  operating breakeven point will decrease 
B)  operating breakeven point will increase 
C)  variable costs per unit will decrease 
D)  variable costs per unit will increase

Question 12

A firm's capital structure can significantly affect the firm's value by affecting its risk and return.

Accepted Answer

A) True 
 B)False

Question 13

Optimal capital structure is the capital structure at which the weighted average cost of capital is minimized, thereby maximizing a firm's value.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following affects business risk?

Accepted Answer

A)  revenue stability 
B)  financial leases 
C)  operating leverage 
D)  preferred stock 
A)  revenue stability 
B)  financial leases 
C)  operating leverage 
D)  preferred stock

Question 15

The contribution margin is defined as the percent of each sales dollar that remains after satisfying fixed operating costs.

Accepted Answer

A) True 
 B)False

Question 16

The inexpensive nature of long-term debt in a firm's capital structure is due to the fact that ________.

Accepted Answer

A)  the equity holders are the true owners of the firm 
B)  equity capital has a fixed return 
C)  creditors have a higher position in the priority of claims 
D)  dividend payments are tax-deductible 
A)  the equity holders are the true owners of the firm 
B)  equity capital has a fixed return 
C)  creditors have a higher position in the priority of claims 
D)  dividend payments are tax-deductible

Question 17

Holding all other factors constant, a firm that is subject to a greater level of business risk should employ less total leverage than an otherwise equivalent firm that is subject to a lesser level of business risk.

Accepted Answer

A) True 
 B)False

With the existence of fixed operating costs, a decrease in sales will result in ________ in EBIT.

Operating leverage results from the existence of operating costs in a firm's income stream.

The inexpensive nature of long-term debt in a firm's capital structure is due to the fact that ________.

________ refers to the effects that fixed costs have on the returns that shareholders earn.

Total leverage can be defined as the potential use of fixed costs, both operating and financial, to magnify the effect of changes in sales on a firm's earnings per share.

Poor capital structure decisions can result in the cost of capital, resulting in acceptable investments.

An increase in fixed operating costs will result in ________.

Fixed financial charges include ________.

Frankline Coin, Inc. is considering two capital structures. The key information follows. Assume a 40 percent tax rate and expected EBIT of $50,000. (a) Calculate two EBIT-EPS coordinates for each of the structures. (b) Indicate over what EBIT range, if any, each structure is preferred.

Operating leverage is defined as the use of fixed operating costs to magnify the effects of changes in sales on a firm's earnings before interest and taxes.

If a firm's sale price per unit decreases, the firm's ________.

A firm's capital structure can significantly affect the firm's value by affecting its risk and return.

Optimal capital structure is the capital structure at which the weighted average cost of capital is minimized, thereby maximizing a firm's value.

Which of the following affects business risk?

The contribution margin is defined as the percent of each sales dollar that remains after satisfying fixed operating costs.

The inexpensive nature of long-term debt in a firm's capital structure is due to the fact that ________.

Holding all other factors constant, a firm that is subject to a greater level of business risk should employ less total leverage than an otherwise equivalent firm that is subject to a lesser level of business risk.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

The Cost of Capital

Capital Budgeting Techniques

Capital Budgeting Cash Flows

Risk and Refinements in Capital Budgeting

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Hybrid and Derivative Securities

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters

Exam 13: Leverage and Capital Structure

With the existence of fixed operating costs, a decrease in sales will result in ________ in EBIT.

Operating leverage results from the existence of operating costs in a firm's income stream.

The inexpensive nature of long-term debt in a firm's capital structure is due to the fact that ________.

________ refers to the effects that fixed costs have on the returns that shareholders earn.

Total leverage can be defined as the potential use of fixed costs, both operating and financial, to magnify the effect of changes in sales on a firm's earnings per share.

Poor capital structure decisions can result in ________ the cost of capital, resulting in ________ acceptable investments.

An increase in fixed operating costs will result in ________.

Fixed financial charges include ________.

Frankline Coin, Inc. is considering two capital structures. The key information follows. Assume a 40 percent tax rate and expected EBIT of $50,000. (a) Calculate two EBIT-EPS coordinates for each of the structures. (b) Indicate over what EBIT range, if any, each structure is preferred.

Operating leverage is defined as the use of fixed operating costs to magnify the effects of changes in sales on a firm's earnings before interest and taxes.

If a firm's sale price per unit decreases, the firm's ________.

A firm's capital structure can significantly affect the firm's value by affecting its risk and return.

Optimal capital structure is the capital structure at which the weighted average cost of capital is minimized, thereby maximizing a firm's value.

Which of the following affects business risk?

The contribution margin is defined as the percent of each sales dollar that remains after satisfying fixed operating costs.

The inexpensive nature of long-term debt in a firm's capital structure is due to the fact that ________.

Holding all other factors constant, a firm that is subject to a greater level of business risk should employ less total leverage than an otherwise equivalent firm that is subject to a lesser level of business risk.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

The Cost of Capital

Capital Budgeting Techniques

Capital Budgeting Cash Flows

Risk and Refinements in Capital Budgeting

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Hybrid and Derivative Securities

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters

Poor capital structure decisions can result in the cost of capital, resulting in acceptable investments.