Exam 13: Leverage and Capital Structure

In order to enhance the wealth of stockholders and to send positive signals to the market, corporations generally raise funds using the following order:

The closer the base sales level used is to the operating breakeven point, the smaller the operating leverage.

In general, non-U.S. companies have much higher debt ratios than do their U.S. counterparts because financial markets are much more developed in the United States than elsewhere and have played a much greater role in corporate financing than has been the case in other countries.

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

The conflict resulting from a manager's desire to increase the firm's risk without increasing current borrowing costs and lenders' desire to limit lending is one effect of the ________ problem.

Firms having stable and predictable revenues can more safely employ highly leveraged capital structures than can firms with volatile patterns of sales revenue.

________ is the potential use of fixed operating costs to magnify the effects of changes in sales on earnings before interest and taxes.

________ is 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.

________ analysis is a technique used to assess the returns associated with various cost structures and levels of sales.

If a firm's fixed financial costs decrease, the firm's operating breakeven point will

________ leverage is concerned with the relationship between earnings before interest and taxes and earnings per share.

At a base sales level of $400,000, a firm has a degree of operating leverage of 2 and a degree of financial leverage of 1.5. The firm's degree of total leverage is ________.

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

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

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

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

After satisfying obligations to creditors, the government, and preferred stockholders, any remaining earnings will most likely be allocated to any of the following EXCEPT

Minimizing the weighted average cost of capital allows management to undertake a larger number of profitable projects, thereby further increasing the value of the firm.

Fixed financial charges include

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 ________.