Exam 12: Leverage and Capital Structure

The operating breakeven point can be found by solving for the sales level that just covers total fixed and variable costs.

If a firm's variable costs per unit increase, the firm's operating breakeven point will

Effective capital structure decisions can lower the cost of capital, resulting in higher NPVs and more acceptable projects, thereby increasing the value of the firm.

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.

One of the limitations of breakeven analysis is its short-term time horizon. A large outlay in the current financial period could significantly raise the firm's breakeven point, while the benefits may occur over a period of years.

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.

________ leverage is concerned with the relationship between sales revenues and earnings before interest and taxes.

In the EBIT-EPS approach to capital structure, risk is represented by

Due to its secondary position relative to equity, suppliers of debt capital face greater risk and therefore must be compensated with higher expected returns than suppliers of equity capital.

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.

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

A corporation has $5,000,000 of 8 percent preferred stock outstanding and a 40 percent tax rate. The after-tax cost of the preferred stock is

An increase in cost (fixed cost or variable cost) tends to increase the operating breakeven point, whereas an increase in the sales price per unit will decrease the operating breakeven point.

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

A firm has fixed operating costs of $150,000, total sales of $1,500,000, and total variable costs of $1,275,000. The firm's operating breakeven point in dollars is

The more fixed cost financing a firm has in its capital structure, the greater its financial leverage and risk.

Higher financial leverage causes ________ to increase more for a given increase in ________.