Question 1

Table 12.1  
-What is the EPS under Financing Plan 1, if the firm projects EBIT of $200,000 and has a tax rate of 40 percent? (See Table 12.1)

Accepted Answer

Calculate the EPS with the formula:
EPS =   EPS =   = 0.51

Question 2

Business risk is affected by all of the following EXCEPT

Accepted Answer

A)  revenue stability. 
B)  cost stability. 
C)  operating leverage. 
D)  earnings per share. 
A)  revenue stability. 
B)  cost stability. 
C)  operating leverage. 
D)  earnings per share. D

Question 3

In general, non-U.S. companies have much higher debt ratios than do their U.S. counterparts because financial markets are much more developed in the United States than elsewhere and have played a much greater role in corporate financing than has been the case in other countries.

Accepted Answer

A) True 
 B)False  True

Question 4

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 5

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?

Accepted Answer

(a) Q = @#IMG-DLM& = @#IMG-DLM& = 75,000 units
(b)

Question 6

________ 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 7

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 8

________ costs are a function of volume, not time.

Accepted Answer

A)  Fixed operating 
B)  Semi-variable 
C)  Variable 
D)  Fixed financial 
A)  Fixed operating 
B)  Semi-variable 
C)  Variable 
D)  Fixed financial

Question 9

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 10

A firm has fixed operating costs of $650,000, a sales price per unit of $20, and a variable cost per unit of $13. At a base sales level of 500,000 units, the firm's degree of operating leverage is ________.

Accepted Answer

A)  1.07 
B)  1.11 
C)  1.18 
D)  1.23 
A)  1.07 
B)  1.11 
C)  1.18 
D)  1.23

Question 11

If a firm's sale price per unit decreases, 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 12

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

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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 15

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 16

A firm has fixed operating costs of $10,000, the sale price per unit of its product is $25, and its variable cost per unit is $15. The firm's operating breakeven point in units is ________ and its breakeven point in dollars is ________.

Accepted Answer

A)  250; $ 6,250 
B)  400; $10,000 
C)  667; $16,675 
D)  1,000; $25,000 
A)  250; $ 6,250 
B)  400; $10,000 
C)  667; $16,675 
D)  1,000; $25,000

Question 17

Operating and financial constraints placed on a corporation by loan provision are

Accepted Answer

A)  agency costs to the lender. 
B)  agency costs to the firm. 
C)  interest rate costs to the firm. 
D)  necessary to control the risk of the firm. 
A)  agency costs to the lender. 
B)  agency costs to the firm. 
C)  interest rate costs to the firm. 
D)  necessary to control the risk of the firm.

Question 18

Beijing Berings is considering purchasing a small firm in the same line of business. The purchase would be financed by the sale of common stock or a bond issue. The financial manager needs to evaluate how the two alternative financing plans will affect the earnings potential of the firm. Total financing required is $4.5 million. The firm currently has $20,000,000 of 12 percent bonds and 600,000 common shares outstanding. The firm can arrange financing of the $4.5 million through a 14 percent bond issue or the sale of 100,000 shares of common stock. The firm has a 40 percent tax rate.
(a) What is the degree of financial leverage for each plan at $7,000,000 of EBIT?
(b) What is the financial breakeven point for each plan?

Accepted Answer

(a) DFL at base level EBIT (Bond Issue)

Question 19

Frankline Coin, Inc. is considering two capital structures. The key information follows. Assume a 40 percent tax rate and expected EBIT of $50,000.   (a) Calculate two EBIT-EPS coordinates for each of the structures.
(b) Indicate over what EBIT range, if any, each structure is preferred.

Accepted Answer

(a) @#IMG-DLM& (b) Calculation of indifference poi

Question 20

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.

Table 12.1 -What is the EPS under Financing Plan 1, if the firm projects EBIT of $200,000 and has a tax rate of 40 percent? (See Table 12.1)

Business risk is affected by all of the following EXCEPT

In general, non-U.S. companies have much higher debt ratios than do their U.S. counterparts because financial markets are much more developed in the United States than elsewhere and have played a much greater role in corporate financing than has been the case in other countries.

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.

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

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

________ costs are a function of volume, not time.

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

A firm has fixed operating costs of $650,000, a sales price per unit of $20, and a variable cost per unit of $13. At a base sales level of 500,000 units, the firm's degree of operating leverage is ________.

If a firm's sale price per unit decreases, the firm's operating breakeven point will

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

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

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.

A firm has fixed operating costs of $10,000, the sale price per unit of its product is $25, and its variable cost per unit is $15. The firm's operating breakeven point in units is and its breakeven point in dollars is .

Operating and financial constraints placed on a corporation by loan provision are

Frankline Coin, Inc. is considering two capital structures. The key information follows. Assume a 40 percent tax rate and expected EBIT of $50,000. (a) Calculate two EBIT-EPS coordinates for each of the structures. (b) Indicate over what EBIT range, if any, each structure is preferred.

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

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 and Risk Refinements

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Filters

Exam 12: Leverage and Capital Structure

Table 12.1 -What is the EPS under Financing Plan 1, if the firm projects EBIT of $200,000 and has a tax rate of 40 percent? (See Table 12.1)

Business risk is affected by all of the following EXCEPT

In general, non-U.S. companies have much higher debt ratios than do their U.S. counterparts because financial markets are much more developed in the United States than elsewhere and have played a much greater role in corporate financing than has been the case in other countries.

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.

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

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

________ costs are a function of volume, not time.

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

A firm has fixed operating costs of $650,000, a sales price per unit of $20, and a variable cost per unit of $13. At a base sales level of 500,000 units, the firm's degree of operating leverage is ________.

If a firm's sale price per unit decreases, the firm's operating breakeven point will

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

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

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.

A firm has fixed operating costs of $10,000, the sale price per unit of its product is $25, and its variable cost per unit is $15. The firm's operating breakeven point in units is ________ and its breakeven point in dollars is ________.

Operating and financial constraints placed on a corporation by loan provision are

Frankline Coin, Inc. is considering two capital structures. The key information follows. Assume a 40 percent tax rate and expected EBIT of $50,000. (a) Calculate two EBIT-EPS coordinates for each of the structures. (b) Indicate over what EBIT range, if any, each structure is preferred.

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

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 and Risk Refinements

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Filters

A firm has fixed operating costs of $10,000, the sale price per unit of its product is $25, and its variable cost per unit is $15. The firm's operating breakeven point in units is and its breakeven point in dollars is .