Question 1

The total leverage measures the combined effect of operating and financial leverage on a firm's risk.

Accepted Answer

A) True 
 B)False

Question 2

Table 12.1  
-At about what EBIT level should the financial manager be indifferent to either plan? (See Table 12.1)

Accepted Answer

The financial manager should be indiffer

Question 3

The cost of equity is greater than the cost of debt and increases with increasing financial leverage,but generally less rapidly than the cost of debt.

Accepted Answer

A) True 
 B)False

Question 4

The pecking order explanation of capital structure states that a hierarchy of financing exists for firms,in which new external debt financing is employed first,followed by retained earnings and finally by external equity financing.

Accepted Answer

A) True 
 B)False

Question 5

Because the degree of total leverage is multiplicative and not additive,when a firm has very high operating leverage it can moderate its total risk by ________.

Accepted Answer

A)  increasing sales 
B)  using a higher level of financial leverage 
C)  increasing EBIT 
D)  using a lower level of financial leverage 
A)  increasing sales 
B)  using a higher level of financial leverage 
C)  increasing EBIT 
D)  using a lower level of financial leverage

Question 6

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 7

Tangshan Mining Company must choose its optimal capital structure.Currently,the firm has a 40 percent debt ratio and the firm expects to generate a dividend next year of $4.89 per share and dividends are expected to grow at a constant rate of 5 percent for the foreseeable future.Stockholders currently require a 10.89 percent return on their investment.Tangshan Mining is considering changing its capital structure if it would benefit shareholders.The firm estimates that if it increases the debt ratio to 50 percent,it will increase its expected dividend to $5.24 per share.Because of the additional leverage,dividend growth is expected to increase to 6 percent and this growth will be sustained indefinitely.However,because of the added risk,the required return demanded by stockholders will increase to 11.34 percent.
(a)What is the value per share for Tangshan Mining under the current capital structure?
(b)What is the value per share for Tangshan Mining under the proposed capital structure?
(c)Should Tangshan Mining make the capital structure change? Explain.

Accepted Answer

(a)The current price of Tangshan Mining

Question 8

The optimal capital structure is the one that balances ________.

Accepted Answer

A)  return and risk factors in order to maximize profits 
B)  return and risk factors in order to maximize earnings per share 
C)  return and risk factors in order to maximize market value 
D)  return and risk factors in order to maximize dividends 
A)  return and risk factors in order to maximize profits 
B)  return and risk factors in order to maximize earnings per share 
C)  return and risk factors in order to maximize market value 
D)  return and risk factors in order to maximize dividends

Question 9

The breakeven point in dollars can be computed by dividing the contribution margin into the variable operating costs.

Accepted Answer

A) True 
 B)False

Question 10

In theory,a firm should maintain financial leverage consistent with a capital structure that ________.

Accepted Answer

A)  meets the industry standards 
B)  meets the investor expectations 
C)  maximizes the owner's wealth 
D)  maximizes dividends 
A)  meets the industry standards 
B)  meets the investor expectations 
C)  maximizes the owner's wealth 
D)  maximizes dividends

Question 11

A firm has interest expense of $145,000,preferred dividends of $25,000,and a tax rate of 40 percent.The firm's financial breakeven point is ________.

Accepted Answer

A)  $ 25,000 
B)  $170,000 
C)  $186,667 
D)  $145,000 
A)  $ 25,000 
B)  $170,000 
C)  $186,667 
D)  $145,000

Question 12

A major assumption of breakeven analysis and one which causes severe limitations in its use is that ________.

Accepted Answer

A)  fixed costs really are fixed 
B)  total revenue is nonlinear 
C)  revenues and operating costs are linear 
D)  all costs are really semi-variable 
A)  fixed costs really are fixed 
B)  total revenue is nonlinear 
C)  revenues and operating costs are linear 
D)  all costs are really semi-variable

Question 13

The three basic types of leverage are ________.

Accepted Answer

A)  operating, production, and financial 
B)  operating, production, and total 
C)  production, financial, and total 
D)  operating, financial, and total 
A)  operating, production, and financial 
B)  operating, production, and total 
C)  production, financial, and total 
D)  operating, financial, and total

Question 14

After satisfying obligations to creditors,the government,and preferred stockholders,any remaining earnings will most likely be allocated to ________.

Accepted Answer

A)  common shareholders as cash dividends 
B)  common shareholders as stock dividends 
C)  other firms requiring capital 
D)  pay future preferred dividends 
A)  common shareholders as cash dividends 
B)  common shareholders as stock dividends 
C)  other firms requiring capital 
D)  pay future preferred dividends

Question 15

A firm is analyzing two possible capital structures-30 and 50 percent debt ratios.The firm has total assets of $5,000,000 and common stock valued at $50 per share.The firm has a marginal tax rate of 40 percent on ordinary income.The number of common shares outstanding for each of the capital structures would be ________.

Accepted Answer

A)  30 percent debt ratio: 30,000 shares and 50 percent debt ratio: 50,000 shares 
B)  30 percent debt ratio: 50,000 shares and 50 percent debt ratio: 70,000 shares 
C)  30 percent debt ratio: 70,000 shares and 50 percent debt ratio: 100,000 shares 
D)  30 percent debt ratio: 70,000 shares and 50 percent debt ratio: 50,000 shares 
A)  30 percent debt ratio: 30,000 shares and 50 percent debt ratio: 50,000 shares 
B)  30 percent debt ratio: 50,000 shares and 50 percent debt ratio: 70,000 shares 
C)  30 percent debt ratio: 70,000 shares and 50 percent debt ratio: 100,000 shares 
D)  30 percent debt ratio: 70,000 shares and 50 percent debt ratio: 50,000 shares

Question 16

The degree of operating leverage depends on the base level of sales used as a point of reference.The closer the base sales level used is to the operating breakeven point,the greater the operating leverage.

Accepted Answer

A) True 
 B)False

Question 17

The use of a dollar breakeven point is important when a firm has more than one product,especially when each product is selling at a different price.

Accepted Answer

A) True 
 B)False

The total leverage measures the combined effect of operating and financial leverage on a firm's risk.

Table 12.1 -At about what EBIT level should the financial manager be indifferent to either plan? (See Table 12.1)

The cost of equity is greater than the cost of debt and increases with increasing financial leverage,but generally less rapidly than the cost of debt.

The pecking order explanation of capital structure states that a hierarchy of financing exists for firms,in which new external debt financing is employed first,followed by retained earnings and finally by external equity financing.

Because the degree of total leverage is multiplicative and not additive,when a firm has very high operating leverage it can moderate its total risk by ________.

An increase in fixed operating costs will result in ________.

The optimal capital structure is the one that balances ________.

The breakeven point in dollars can be computed by dividing the contribution margin into the variable operating costs.

In theory,a firm should maintain financial leverage consistent with a capital structure that ________.

A firm has interest expense of $145,000,preferred dividends of $25,000,and a tax rate of 40 percent.The firm's financial breakeven point is ________.

A major assumption of breakeven analysis and one which causes severe limitations in its use is that ________.

The three basic types of leverage are ________.

After satisfying obligations to creditors,the government,and preferred stockholders,any remaining earnings will most likely be allocated to ________.

The degree of operating leverage depends on the base level of sales used as a point of reference.The closer the base sales level used is to the operating breakeven point,the greater the operating leverage.

The use of a dollar breakeven point is important when a firm has more than one product,especially when each product is selling at a different price.

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 and Risk Refinements

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Filters

Exam 12: Leverage and Capital Structure

The total leverage measures the combined effect of operating and financial leverage on a firm's risk.

Table 12.1 -At about what EBIT level should the financial manager be indifferent to either plan? (See Table 12.1)

The cost of equity is greater than the cost of debt and increases with increasing financial leverage,but generally less rapidly than the cost of debt.

The pecking order explanation of capital structure states that a hierarchy of financing exists for firms,in which new external debt financing is employed first,followed by retained earnings and finally by external equity financing.

Because the degree of total leverage is multiplicative and not additive,when a firm has very high operating leverage it can moderate its total risk by ________.

An increase in fixed operating costs will result in ________.

The optimal capital structure is the one that balances ________.

The breakeven point in dollars can be computed by dividing the contribution margin into the variable operating costs.

In theory,a firm should maintain financial leverage consistent with a capital structure that ________.

A firm has interest expense of $145,000,preferred dividends of $25,000,and a tax rate of 40 percent.The firm's financial breakeven point is ________.

A major assumption of breakeven analysis and one which causes severe limitations in its use is that ________.

The three basic types of leverage are ________.

After satisfying obligations to creditors,the government,and preferred stockholders,any remaining earnings will most likely be allocated to ________.

The degree of operating leverage depends on the base level of sales used as a point of reference.The closer the base sales level used is to the operating breakeven point,the greater the operating leverage.

The use of a dollar breakeven point is important when a firm has more than one product,especially when each product is selling at a different price.

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 and Risk Refinements

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Filters