Exam 13: Leverage and Capital Structure

Probability of bankruptcy is determined by

The pecking order explanation of capital structure states that a hierarchy of financing exists for firms in which new external debt financing is employed first, followed by retained earnings and finally by external equity financing.

Total leverage is concerned with the relationship between the firm's sales revenue and its common stock earnings per share.

Bamboo manufacturing sells its finished product for an average of $35 per unit with a variable cost per unit of $21. The company has fixed operating costs of $1,050,000. (a) Calculate the firm's operating breakeven point in units. (b) Calculate the firm's operating breakeven point in dollars. (c) Using 100,000 units as a base, what is the firm's degree of operating leverage?

A firm has interest expense of $145,000, preferred dividends of $25,000, and a tax rate of 40 percent. The firm's financial breakeven point is

Because of the extensive research conducted in recent years in the area of capital structure theory, it is now possible for financial managers to pinpoint with great accuracy a firm's optimal capital structure.

Operating leverage is present when a firm has fixed operating costs.

The relationship between operating and financial leverage is additive rather than multiplicative.

Total leverage measures the effect of fixed costs on the relationship between

In general, the greater the firm's operating leverage, the higher its business risk.

Yongman Electronics has decided to invest $10,000,000 in a new headquarters and needs to determine the best way to finance the construction. The firm currently has $50,000,000 of 10 percent bonds and 4,000,000 common shares outstanding. The firm can obtain the $10,000,000 of financing through a 10 percent bond issue or the sale of 1,000,000 shares of common stock. The firm has a 40 percent tax rate. (a) What is the degree of financial leverage for each plan at $25,000,000 of EBIT? (b) What is the financial breakeven point for each plan?

Despite the extensive research conducted in recent years in the area of capital structure theory, it is not yet possible to provide financial managers with a specified methodology for use in determining a firm's optimal capital structure.

Optimal capital structure is the capital structure at which the weighted average cost of capital is minimized, thereby maximizing the firm's value.

Under certain circumstances, when the firm is in default debtholders and preferred stockholders may receive a voice in management; otherwise, only common stockholders have voting rights.

Breakeven analysis is used by the firm

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 dollars is

A corporation has $5,000,000 of 10 percent bonds and $3,000,000 of 12 percent preferred stock outstanding. The firm's financial breakeven (assuming a 40 percent tax rate) is

________ leverage is concerned with the relationship between sales revenue and earnings per share.

The basic shortcoming of EBIT-EPS analysis is that this model focuses on the maximization of earnings rather than on the maximization of share price.

The basic shortcoming of EBIT-EPS analysis is that this model focuses on the maximization of stock returns rather than on the maximization of share price.