Question 1

The per dollar contribution toward fixed operating costs and profits provided by each dollar of sales is the

Accepted Answer

A)  profit margin. 
B)  contribution margin. 
C)  expense ratio. 
D)  fixed coverage ratio. 
A)  profit margin. 
B)  contribution margin. 
C)  expense ratio. 
D)  fixed coverage ratio.

Question 2

________ is the risk to the firm of being unable to cover financial obligations.

Accepted Answer

A)  Total risk 
B)  Business risk 
C)  Financial risk 
D)  Diversifiable risk 
A)  Total risk 
B)  Business risk 
C)  Financial risk 
D)  Diversifiable risk

Question 3

The firm's operating breakeven point is the point at which

Accepted Answer

A)  total operating costs equal total fixed costs. 
B)  total operating costs are zero. 
C)  EBIT is less than sales. 
D)  EBIT is zero. 
A)  total operating costs equal total fixed costs. 
B)  total operating costs are zero. 
C)  EBIT is less than sales. 
D)  EBIT is zero.

Question 4

A firm has EBIT of $375,000, interest expense of $75,000, preferred dividends of $6,000 and a tax rate of 40 percent. The firm's degree of financial leverage at a base EBIT level of $375,000 is ________.

Accepted Answer

A)  0.97 
B)  1.29 
C)  1.27 
D)  1.09 
A)  0.97 
B)  1.29 
C)  1.27 
D)  1.09

Question 5

In the EBIT-EPS approach to capital structure, a constant level of EBIT is assumed

Accepted Answer

A)  to ease the calculations of owners' equity. 
B)  to isolate the impact on returns of the financing costs associated with alternative capital structures. 
C)  to emphasize the relationship between interest expenses and taxes. 
D)  to concentrate on the effect of revenue and expense on capital structure decisions. 
A)  to ease the calculations of owners' equity. 
B)  to isolate the impact on returns of the financing costs associated with alternative capital structures. 
C)  to emphasize the relationship between interest expenses and taxes. 
D)  to concentrate on the effect of revenue and expense on capital structure decisions.

Question 6

In theory, a firm's optimal capital structure is that which minimized the firm's overall cost of capital resulting in a maximization of the market value of the firm.

Accepted Answer

A) True 
 B)False

Question 7

Due to its secondary position relative to equity, suppliers of debt capital face greater risk and therefore must be compensated with higher expected returns than suppliers of equity capital.

Accepted Answer

A) True 
 B)False

Question 8

All items on the right-hand side of the firm's balance sheet, excluding current liabilities are called capital.

Accepted Answer

A) True 
 B)False

Question 9

A firm has fixed operating costs of $150,000, total sales of $1,500,000, and total variable costs of $1,275,000. The firm's operating breakeven point in dollars is

Accepted Answer

A)  $150,000. 
B)  $176,471. 
C)  $1,000,000. 
D)  $1,425,000. 
A)  $150,000. 
B)  $176,471. 
C)  $1,000,000. 
D)  $1,425,000.

Question 10

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 11

All of the following affect business risk EXCEPT

Accepted Answer

A)  operating leverage. 
B)  interest rate stability. 
C)  cost stability. 
D)  revenue stability. 
A)  operating leverage. 
B)  interest rate stability. 
C)  cost stability. 
D)  revenue stability.

Question 12

The higher the degree of financial leverage (DFL), the greater the leverage a given financing plan has, and the steeper its slope when plotted on EBIT-EPS axes.

Accepted Answer

A) True 
 B)False

Question 13

With the existence of fixed operating costs, an increase in sales will result in ________ increase in EBIT.

Accepted Answer

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

Question 14

The EBIT-EPS approach to capital structure involves selecting the capital structure that maximizes earnings before interest and taxes (EBIT) over the expected range of earnings per share (EPS).

Accepted Answer

A) True 
 B)False

Question 15

Earnings before interest and taxes (EBIT) is a descriptive label for

Accepted Answer

A)  operating profits. 
B)  net profits before taxes. 
C)  earnings per share. 
D)  gross profits. 
A)  operating profits. 
B)  net profits before taxes. 
C)  earnings per share. 
D)  gross profits.

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

Which one of the following is considered a limitation of breakeven analysis?

Accepted Answer

A)  It assumes that the firm faces linear, or nonvarying, sales revenue and total operating cost functions. 
B)  It is difficult to break semivariable costs into fixed and variable components. 
C)  It has a short-term time horizon. 
D)  All of the above. 
A)  It assumes that the firm faces linear, or nonvarying, sales revenue and total operating cost functions. 
B)  It is difficult to break semivariable costs into fixed and variable components. 
C)  It has a short-term time horizon. 
D)  All of the above.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Tony's Beach T-Shirts has fixed annual operating costs of $75,000. Tony retails his T-shirts for $14.99 each and the variable cost per T-shirt is $4.99. Based on this information, the breakeven sales level in units is

Accepted Answer

A)  7,500. 
B)  15,030. 
C)  5,003. 
D)  none of the above. 
A)  7,500. 
B)  15,030. 
C)  5,003. 
D)  none of the above.

Question 20

Financial leverage is concerned with the relationship between the firm's earnings after interest and taxes and its common stock earnings per share.

Accepted Answer

A) True 
 B)False

The per dollar contribution toward fixed operating costs and profits provided by each dollar of sales is the

________ is the risk to the firm of being unable to cover financial obligations.

The firm's operating breakeven point is the point at which

A firm has EBIT of $375,000, interest expense of $75,000, preferred dividends of $6,000 and a tax rate of 40 percent. The firm's degree of financial leverage at a base EBIT level of $375,000 is ________.

In the EBIT-EPS approach to capital structure, a constant level of EBIT is assumed

In theory, a firm's optimal capital structure is that which minimized the firm's overall cost of capital resulting in a maximization of the market value of the firm.

Due to its secondary position relative to equity, suppliers of debt capital face greater risk and therefore must be compensated with higher expected returns than suppliers of equity capital.

All items on the right-hand side of the firm's balance sheet, excluding current liabilities are called capital.

A firm has fixed operating costs of $150,000, total sales of $1,500,000, and total variable costs of $1,275,000. The firm's operating breakeven point in dollars is

All of the following affect business risk EXCEPT

The higher the degree of financial leverage (DFL), the greater the leverage a given financing plan has, and the steeper its slope when plotted on EBIT-EPS axes.

With the existence of fixed operating costs, an increase in sales will result in ________ increase in EBIT.

The EBIT-EPS approach to capital structure involves selecting the capital structure that maximizes earnings before interest and taxes (EBIT) over the expected range of earnings per share (EPS).

Earnings before interest and taxes (EBIT) is a descriptive label for

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

Which one of the following is considered a limitation of breakeven analysis?

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

Tony's Beach T-Shirts has fixed annual operating costs of $75,000. Tony retails his T-shirts for $14.99 each and the variable cost per T-shirt is $4.99. Based on this information, the breakeven sales level in units is

Financial leverage is concerned with the relationship between the firm's earnings after interest and taxes and its common stock earnings per share.

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

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Exam 13: Leverage and Capital Structure

The per dollar contribution toward fixed operating costs and profits provided by each dollar of sales is the

________ is the risk to the firm of being unable to cover financial obligations.

The firm's operating breakeven point is the point at which

A firm has EBIT of $375,000, interest expense of $75,000, preferred dividends of $6,000 and a tax rate of 40 percent. The firm's degree of financial leverage at a base EBIT level of $375,000 is ________.

In the EBIT-EPS approach to capital structure, a constant level of EBIT is assumed

In theory, a firm's optimal capital structure is that which minimized the firm's overall cost of capital resulting in a maximization of the market value of the firm.

Due to its secondary position relative to equity, suppliers of debt capital face greater risk and therefore must be compensated with higher expected returns than suppliers of equity capital.

All items on the right-hand side of the firm's balance sheet, excluding current liabilities are called capital.

A firm has fixed operating costs of $150,000, total sales of $1,500,000, and total variable costs of $1,275,000. The firm's operating breakeven point in dollars is

All of the following affect business risk EXCEPT

The higher the degree of financial leverage (DFL), the greater the leverage a given financing plan has, and the steeper its slope when plotted on EBIT-EPS axes.

With the existence of fixed operating costs, an increase in sales will result in ________ increase in EBIT.

The EBIT-EPS approach to capital structure involves selecting the capital structure that maximizes earnings before interest and taxes (EBIT) over the expected range of earnings per share (EPS).

Earnings before interest and taxes (EBIT) is a descriptive label for

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

Which one of the following is considered a limitation of breakeven analysis?

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

Tony's Beach T-Shirts has fixed annual operating costs of $75,000. Tony retails his T-shirts for $14.99 each and the variable cost per T-shirt is $4.99. Based on this information, the breakeven sales level in units is

Financial leverage is concerned with the relationship between the firm's earnings after interest and taxes and its common stock earnings per share.

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