Exam 13: Leverage and Capital Structure

The key differences between debt and equity capital include all of the following EXCEPT

Table 13.1 -Which plan has a higher degree of financial leverage and financial risk? (See Table 13.1)

Operating leverage may be defined as the potential use of fixed operating costs to magnify the effects of changes in sales on the firm's earnings before interest and taxes (EBIT).

In the traditional approach to capital structure, as the amount of debt increases in a firm's capital structure,

________ costs require the payment of a specified amount in each accounting period.

Mark must buy four new tires for his car. He is considering buying tires that are $25 a piece more than his regular brand, because the higher priced tires are supposed to increase his miles per gallon by 20%. If the tires are good for 48,000 miles and Mark drives an average of 1000 miles per month, gas costs $2.50 per gallon over the next 4 years, and Mark's car gets 30 miles to the gallon now (on the old tires), should Mark purchase the more expensive tires?

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 the firm's earnings per share.

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

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

The levels of fixed-cost assets and funds that management selects affect the variability of returns.

Effective capital structure decisions can lower the cost of capital, resulting in higher NPVs and more acceptable projects, thereby increasing the value of the firm.

A corporation has $5,000,000 of 8 percent preferred stock outstanding and a 40 percent tax rate. The after-tax cost of the preferred stock is

In general, a firm's theoretical optimal capital structure is that which balances the tax disadvantage of debt financing against the increase probability of bankruptcy that results from its use.

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

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

The EBIT-EPS analysis tends to concentrate on maximization of earnings rather than maximization of owners' wealth.

Which of the following is NOT a variable cost?