Question 1

One function of breakeven analysis is to

Accepted Answer

A)  create profits. 
B)  describe leverage. 
C)  evaluate the profitability of various sales levels. 
D)  determine the amount of financing needed by the firm. 
A)  create profits. 
B)  describe leverage. 
C)  evaluate the profitability of various sales levels. 
D)  determine the amount of financing needed by the firm.

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A)  EPS maximization does not consider risk. 
B)  share value maximization does not consider risk. 
C)  EPS maximization considers cash flows. 
D)  EPS maximization does consider risk. 
A)  EPS maximization does not consider risk. 
B)  share value maximization does not consider risk. 
C)  EPS maximization considers cash flows. 
D)  EPS maximization does consider risk.

Question 4

Table 13.1  
-What is the degree of financial leverage at a base level EBIT of $120,000 for both financing plans? The firm has a 40 percent tax rate. (See Table 13.1)

Accepted Answer

Degree of financial leverage f

Question 5

An increase in fixed operating and financial cost results in an increase in risk, since the firm will have to achieve a higher level of sales just to break even.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A)  the equity holders are the true owners of the firm. 
B)  equity capital has a fixed return. 
C)  interest payments are tax-deductible. 
D)  equity holders have a higher position in the priority of claims. 
A)  the equity holders are the true owners of the firm. 
B)  equity capital has a fixed return. 
C)  interest payments are tax-deductible. 
D)  equity holders have a higher position in the priority of claims.

Question 7

Whenever the percentage change in earnings before interest and taxes resulting from a given percentage change in sales is greater than the percentage change in sales, operating leverage exists.

Accepted Answer

A) True 
 B)False

Question 8

A shift toward more fixed costs increases business risk, which in turn causes earnings before interest and taxes to increase by less for a given increase in sales.

Accepted Answer

A) True 
 B)False

Question 9

A decrease in fixed financial costs will result in ________ in financial risk.

Accepted Answer

A)  an increase 
B)  a decrease 
C)  no change 
D)  an undetermined change 
A)  an increase 
B)  a decrease 
C)  no change 
D)  an undetermined change

Question 10

A corporation borrows $1,000,000 at 10 percent annual rate of interest. The firm has a 40 percent tax rate. The yearly, after-tax cost of this debt is

Accepted Answer

A)  $ 40,000. 
B)  $ 60,000. 
C)  $100,000. 
D)  $166,667. 
A)  $ 40,000. 
B)  $ 60,000. 
C)  $100,000. 
D)  $166,667.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

The effect of financial leverage is such that an increase in the firm's earnings before interest and taxes (EBIT) results in a more than proportional increase in the firm's earnings per share (EPS), while a decrease in the firm's EBIT results in a less than proportional decrease in EPS.

Accepted Answer

A) True 
 B)False

Question 13

At the operating breakeven point, ________ equals zero.

Accepted Answer

A)  sales revenue 
B)  fixed operating costs 
C)  variable operating costs 
D)  earnings before interest and taxes 
A)  sales revenue 
B)  fixed operating costs 
C)  variable operating costs 
D)  earnings before interest and taxes

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Generally, increases in leverage result in increased return and risk.

Accepted Answer

A) True 
 B)False

Question 16

Generally, ________ in leverage result in ________ return and ________ risk.

Accepted Answer

A)  increases; decreased; increased 
B)  increases; decreased; decreased 
C)  increases; increased; increased 
D)  decreases; increased; decreased 
A)  increases; decreased; increased 
B)  increases; decreased; decreased 
C)  increases; increased; increased 
D)  decreases; increased; decreased

Question 17

The cost of debt financing results from

Accepted Answer

A)  the increased profitability of bankruptcy caused by debt obligations. 
B)  the agency costs of the lender's monitoring and controlling the firm's actions. 
C)  the costs associated with managers having more information about the firm's prospects than do investors. 
D)  all of the above. 
A)  the increased profitability of bankruptcy caused by debt obligations. 
B)  the agency costs of the lender's monitoring and controlling the firm's actions. 
C)  the costs associated with managers having more information about the firm's prospects than do investors. 
D)  all of the above.

Question 18

For sales levels below the operating breakeven point, sales revenue exceeds total operating costs, and earnings before interest and taxes is greater than zero.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

One function of breakeven analysis is to

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

Table 13.1 -What is the degree of financial leverage at a base level EBIT of $120,000 for both financing plans? The firm has a 40 percent tax rate. (See Table 13.1)

An increase in fixed operating and financial cost results in an increase in risk, since the firm will have to achieve a higher level of sales just to break even.

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

Whenever the percentage change in earnings before interest and taxes resulting from a given percentage change in sales is greater than the percentage change in sales, operating leverage exists.

A shift toward more fixed costs increases business risk, which in turn causes earnings before interest and taxes to increase by less for a given increase in sales.

A decrease in fixed financial costs will result in ________ in financial risk.

A corporation borrows $1,000,000 at 10 percent annual rate of interest. The firm has a 40 percent tax rate. The yearly, after-tax cost of this debt is

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

The effect of financial leverage is such that an increase in the firm's earnings before interest and taxes (EBIT) results in a more than proportional increase in the firm's earnings per share (EPS), while a decrease in the firm's EBIT results in a less than proportional decrease in EPS.

At the operating breakeven point, ________ equals zero.

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

Generally, increases in leverage result in increased return and risk.

Generally, in leverage result in return and risk.

The cost of debt financing results from

For sales levels below the operating breakeven point, sales revenue exceeds total operating costs, and earnings before interest and taxes is greater than zero.

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

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

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

Exam 13: Leverage and Capital Structure

One function of breakeven analysis is to

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

Table 13.1 -What is the degree of financial leverage at a base level EBIT of $120,000 for both financing plans? The firm has a 40 percent tax rate. (See Table 13.1)

An increase in fixed operating and financial cost results in an increase in risk, since the firm will have to achieve a higher level of sales just to break even.

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

Whenever the percentage change in earnings before interest and taxes resulting from a given percentage change in sales is greater than the percentage change in sales, operating leverage exists.

A shift toward more fixed costs increases business risk, which in turn causes earnings before interest and taxes to increase by less for a given increase in sales.

A decrease in fixed financial costs will result in ________ in financial risk.

A corporation borrows $1,000,000 at 10 percent annual rate of interest. The firm has a 40 percent tax rate. The yearly, after-tax cost of this debt is

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

The effect of financial leverage is such that an increase in the firm's earnings before interest and taxes (EBIT) results in a more than proportional increase in the firm's earnings per share (EPS), while a decrease in the firm's EBIT results in a less than proportional decrease in EPS.

At the operating breakeven point, ________ equals zero.

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

Generally, increases in leverage result in increased return and risk.

Generally, ________ in leverage result in ________ return and ________ risk.

The cost of debt financing results from

For sales levels below the operating breakeven point, sales revenue exceeds total operating costs, and earnings before interest and taxes is greater than zero.

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

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

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

Generally, in leverage result in return and risk.