Exam 13: Leverage and Capital Structure

The preferred approach to breakeven analysis for the multiproduct firm is the

The cost of equity is greater than the cost of debt and increases with increasing financial leverage, but generally less rapidly than the cost of debt.

Business risk is affected by all of the following EXCEPT

Management has just discovered an excellent investment for which it needs additional funding. Relative to the discussion on asymmetric information the firm should

Generally, increases in leverage result in increased return and risk, whereas decreases in leverage result in decreased return and risk.

Sales commission may be considered as a semivariable cost because it may be fixed for a certain volume of sales and then increase to higher levels for higher volumes.

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, the firm's earnings per share will be ________.

Pecking order is a hierarchy of financing beginning with retained earnings followed by debt financing and finally external equity financing.

The dollar breakeven sales level can be solved for by dividing fixed costs by the contribution margin ratio.

Financial leverage measures the effect of fixed operating costs on the relationship between

The firm's ________ is the mix of long-term debt and equity utilized by the firm, which may significantly affect its value by affecting return and risk.

As financial leverage increases, the cost of debt initially remains constant and then rises, while the cost of equity always rises.

Financial breakeven point represents the level of earnings before interest and taxes necessary for the firm to cover its fixed operating and financial changes that is, the point at which earnings per share (EPS) is equal to zero.

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

The asymmetric information explanation of capital structure suggests that firms will issue new debt only when the managers believe the firm's stock is overvalued; as a result, issuing new debt is considered a negative signal that will result in a decline in share price.

The amount of leverage in the firm's capital structure the mix of long-term debt and equity maintained by the firm can significantly affect its value by affecting return and risk.

Poor capital structure decisions can result in ________ the cost of capital, resulting in ________ acceptable investments. Effective capital structure decisions can ________ the cost of capital, resulting in ________ acceptable investments.

Firm's capital structure is the mix of the short-term debt, long-term debt, and equity maintained by the firm.

The long-term funds of the firm are called

The asymmetric information explanation of capital structure suggests that firms will issue new equity only when the managers believe the firm's stock is overvalued; as a result, issuing new equity is considered a negative signal that will result in a decline in share price.