Exam 12: Leverage and Capital Structure

The relative inexpensiveness of debt capital is due to the fact that the lenders take the least risk among the long-term contributors of capital.

The base level of EBIT must be held constant to compare the financial leverage associated with different levels of fixed financial costs.

The reason why maximizing share value and maximizing EPS do not give the same optimal capital structure is because ________.

The dollar breakeven sales level can be solved for by dividing fixed costs by the dollar contribution margin.

Debt capital is less risky than equity capital because a firm is legally obligated to pay interest to bondholders but they are not legally obligated to pay dividends to preferred or common stockholders.

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

A firm has fixed operating costs of $10,000,the sale price per unit of its product is $25,and its variable cost per unit is $15.The firm's operating breakeven point in units is ________ and its breakeven point in dollars is ________.

The preferred approach to breakeven analysis for a multiproduct firm is the ________.

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

A decrease in fixed financial costs will result in a(n)________.

Leverage results from the use of equity to magnify returns to a firm's owners.

In general,non-U.S.companies have much higher debt ratios than their U.S.counterparts because financial markets are much more developed in the United States than elsewhere.

In the EBIT-EPS approach to capital structure,risk is represented by ________.

A firm's ________ is the mix of long-term debt and equity utilized by the firm,which may significantly affect its value by affecting return and risk.

Pecking order is a hierarchy of financing beginning with retained earnings,followed by debt financing,and finally external equity financing.

When a firm has fixed operating costs,operating leverage is present.In that case,an increase in sales results in a more-than-proportional increase in EBIT,and a decrease in sales results in a more-than-proportional decrease in EBIT.

________ is the risk of being unable to cover operating costs of a firm.

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

The relationship between operating and financial leverage is additive rather than multiplicative.

________ costs are a function of time,not sales,and are typically contractual.