Question 1

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

Accepted Answer

A)  decrease. 
B)  increase. 
C)  remain unchanged. 
D)  change in an undetermined direction. 
A)  decrease. 
B)  increase. 
C)  remain unchanged. 
D)  change in an undetermined direction.

Question 2

The firm's operating breakeven point is the level of sales necessary to cover all fixed operating costs.

Accepted Answer

A) True 
 B)False

Question 3

In general, low debt-payment ratios are associated with high degrees of financial leverage.

Accepted Answer

A) True 
 B)False

Question 4

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

Question 5

The contribution margin is defined as the percent of each sales dollar that remains after satisfying fixed operating costs.

Accepted Answer

A) True 
 B)False

Question 6

The probability that a firm will become bankrupt is largely dependent on its level of both business risk and financial risk.

Accepted Answer

A) True 
 B)False

Question 7

With the existence of fixed operating costs, a decrease in sales will result in ________ in EBIT.

Accepted Answer

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

Question 8

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

Question 9

Through the effects of financial leverage, when EBIT increases, earnings per share will

Accepted Answer

A)  increase. 
B)  decrease. 
C)  remain unchanged. 
D)  change in an undetermined direction. 
A)  increase. 
B)  decrease. 
C)  remain unchanged. 
D)  change in an undetermined direction.

Question 10

________ is the potential use of fixed financial charges to magnify the effects of changes in earnings before interest and taxes on the firm's earnings per share.

Accepted Answer

A)  Financial leverage 
B)  Operating leverage 
C)  Total leverage 
D)  Debt service 
A)  Financial leverage 
B)  Operating leverage 
C)  Total leverage 
D)  Debt service

Question 11

Due to the difficulty of allocating costs to products in a multiproduct firm, the breakeven model may fail to determine breakeven points for each product line.

Accepted Answer

A) True 
 B)False

Question 12

A firm has a current capital structure consisting of $400,000 of 12 percent annual interest debt and 50,000 shares of common stock. The firm's tax rate is 40 percent on ordinary income. If the EBIT is expected to be $200,000, two EBIT-EPS coordinates for the firm's existing capital structure are

Accepted Answer

A)  ($36,000, $0) and ($200,000, $3.04). 
B)  ($48,000, $0) and ($200,000, $1.82). 
C)  ($0, $48,000) and ($200,000, $1.82). 
D)  ($152,000, $3.50) and ($150,000, $1.82). 
A)  ($36,000, $0) and ($200,000, $3.04). 
B)  ($48,000, $0) and ($200,000, $1.82). 
C)  ($0, $48,000) and ($200,000, $1.82). 
D)  ($152,000, $3.50) and ($150,000, $1.82).

Question 13

A firm's operating breakeven point is sensitive to all of the following variables EXCEPT

Accepted Answer

A)  fixed operating costs. 
B)  sales price per unit. 
C)  interest expense. 
D)  variable operating cost per unit. 
A)  fixed operating costs. 
B)  sales price per unit. 
C)  interest expense. 
D)  variable operating cost per unit.

Question 14

According to the traditional approach to capital structure, the value of the firm will be maximized when

Accepted Answer

A)  the financial leverage is maximized. 
B)  the cost of debt is minimized. 
C)  the weighted average cost of capital is minimized. 
D)  the dividend payout is maximized. 
A)  the financial leverage is maximized. 
B)  the cost of debt is minimized. 
C)  the weighted average cost of capital is minimized. 
D)  the dividend payout is maximized.

Question 15

The basic shortcoming of the EBIT-EPS approach to capital structure is

Accepted Answer

A)  that the optimal capital structure is difficult to compute. 
B)  its disregard for the presence of preferred stock in the capital structure. 
C)  its disregard for the firm's dividend policy. 
D)  that it concentrates on the maximization of EPS rather than the maximization of owner's wealth. 
A)  that the optimal capital structure is difficult to compute. 
B)  its disregard for the presence of preferred stock in the capital structure. 
C)  its disregard for the firm's dividend policy. 
D)  that it concentrates on the maximization of EPS rather than the maximization of owner's wealth.

Question 16

A firm has fixed operating costs of $175,000, total sales revenue of $3,000,000 and total variable costs of $2,250,000. The firm's degree of operating leverage is ________.

Accepted Answer

A)  0.77 
B)  1.30 
C)  0.81 
D)  4.29 
A)  0.77 
B)  1.30 
C)  0.81 
D)  4.29

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Leverage results from the use of fixed-cost assets or funds to magnify returns to the firm's owners.

Accepted Answer

A) True 
 B)False

Question 19

Poor capital structure decisions can result in a high cost of capital, thereby making some unacceptable investments acceptable.

Accepted Answer

A) True 
 B)False

Question 20

Whenever the percentage change in earnings per share (EPS) resulting from a given percentage change in sales is greater than the percentage change in sales, financial leverage exists.

Accepted Answer

A) True 
 B)False

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

The firm's operating breakeven point is the level of sales necessary to cover all fixed operating costs.

In general, low debt-payment ratios are associated with high degrees of financial leverage.

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

The contribution margin is defined as the percent of each sales dollar that remains after satisfying fixed operating costs.

The probability that a firm will become bankrupt is largely dependent on its level of both business risk and financial risk.

With the existence of fixed operating costs, a decrease in sales will result in ________ in EBIT.

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

Through the effects of financial leverage, when EBIT increases, earnings per share will

________ is the potential use of fixed financial charges to magnify the effects of changes in earnings before interest and taxes on the firm's earnings per share.

Due to the difficulty of allocating costs to products in a multiproduct firm, the breakeven model may fail to determine breakeven points for each product line.

A firm has a current capital structure consisting of $400,000 of 12 percent annual interest debt and 50,000 shares of common stock. The firm's tax rate is 40 percent on ordinary income. If the EBIT is expected to be $200,000, two EBIT-EPS coordinates for the firm's existing capital structure are

A firm's operating breakeven point is sensitive to all of the following variables EXCEPT

According to the traditional approach to capital structure, the value of the firm will be maximized when

The basic shortcoming of the EBIT-EPS approach to capital structure is

A firm has fixed operating costs of $175,000, total sales revenue of $3,000,000 and total variable costs of $2,250,000. The firm's degree of operating leverage is ________.

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

Leverage results from the use of fixed-cost assets or funds to magnify returns to the firm's owners.

Poor capital structure decisions can result in a high cost of capital, thereby making some unacceptable investments acceptable.

Whenever the percentage change in earnings per share (EPS) resulting from a given percentage change in sales is greater than the percentage change in sales, financial leverage exists.

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

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

The firm's operating breakeven point is the level of sales necessary to cover all fixed operating costs.

In general, low debt-payment ratios are associated with high degrees of financial leverage.

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

The contribution margin is defined as the percent of each sales dollar that remains after satisfying fixed operating costs.

The probability that a firm will become bankrupt is largely dependent on its level of both business risk and financial risk.

With the existence of fixed operating costs, a decrease in sales will result in ________ in EBIT.

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

Through the effects of financial leverage, when EBIT increases, earnings per share will

________ is the potential use of fixed financial charges to magnify the effects of changes in earnings before interest and taxes on the firm's earnings per share.

Due to the difficulty of allocating costs to products in a multiproduct firm, the breakeven model may fail to determine breakeven points for each product line.

A firm has a current capital structure consisting of $400,000 of 12 percent annual interest debt and 50,000 shares of common stock. The firm's tax rate is 40 percent on ordinary income. If the EBIT is expected to be $200,000, two EBIT-EPS coordinates for the firm's existing capital structure are

A firm's operating breakeven point is sensitive to all of the following variables EXCEPT

According to the traditional approach to capital structure, the value of the firm will be maximized when

The basic shortcoming of the EBIT-EPS approach to capital structure is

A firm has fixed operating costs of $175,000, total sales revenue of $3,000,000 and total variable costs of $2,250,000. The firm's degree of operating leverage is ________.

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

Leverage results from the use of fixed-cost assets or funds to magnify returns to the firm's owners.

Poor capital structure decisions can result in a high cost of capital, thereby making some unacceptable investments acceptable.

Whenever the percentage change in earnings per share (EPS) resulting from a given percentage change in sales is greater than the percentage change in sales, financial leverage exists.

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