Question 1

The long-term funds of the firm are called

Accepted Answer

A)  debt. 
B)  assets. 
C)  capital. 
D)  equity. 
A)  debt. 
B)  assets. 
C)  capital. 
D)  equity.

Question 2

The levels of fixed-cost assets and funds that management selects affect the variability of returns.

Accepted Answer

A) True 
 B)False

Question 3

Table 12.1  
-What is the degree of financial leverage at a base level EBIT of $120,000 for both financing plans? The firm has a 40 percent tax rate. (See Table 12.1)

Accepted Answer

Degree of financial leverage f

Question 4

In theory, a firm's optimal capital structure is that which minimized the firm's overall cost of capital resulting in a maximization of the market value of the firm.

Accepted Answer

A) True 
 B)False

Question 5

The higher the financial breakeven point and the steeper the slope of the capital structure line, the greater the financial risk.

Accepted Answer

A) True 
 B)False

Question 6

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 7

Mark must buy four new tires for his car. He is considering buying tires that are $25 a piece more than his regular brand, because the higher priced tires are supposed to increase his miles per gallon by 20%. If the tires are good for 48,000 miles and Mark drives an average of 1000 miles per month, gas costs $2.50 per gallon over the next 4 years, and Mark's car gets 30 miles to the gallon now (on the old tires), should Mark purchase the more expensive tires?

Accepted Answer

A)  Yes, because Mark will save about $660 dollars in gas over the four years but the new tires will only be $100 more. 
B)  Yes, because Mark will save about $560 dollars in gas over the four years but the new tires will only be $100 more. 
C)  No, because Mark will only save about $60 dollars in gas over the four years but the new tires will only be $100 more. 
D)  There is not enough information given in the problem to make the decision. 
A)  Yes, because Mark will save about $660 dollars in gas over the four years but the new tires will only be $100 more. 
B)  Yes, because Mark will save about $560 dollars in gas over the four years but the new tires will only be $100 more. 
C)  No, because Mark will only save about $60 dollars in gas over the four years but the new tires will only be $100 more. 
D)  There is not enough information given in the problem to make the decision.

Question 8

The firm's capital structure can significantly affect the firm's value by affecting its risk and return.

Accepted Answer

A) True 
 B)False

Question 9

Table 12.1  
-At about what EBIT level should the financial manager be indifferent to either plan? (See Table 12.1)

Accepted Answer

@#IMG-DLM& = @#IMG-DLM& At EBI

Question 10

The use of a dollar breakeven point is important when a firm has more than one product, especially when each product is selling at a different price.

Accepted Answer

A) True 
 B)False

Question 11

A firm has an operating profit of $300,000, interest of $35,000, and a tax rate of 40 percent. The firm has an after-tax cost of debt of 5 percent and a cost of equity of 15 percent. The firm's target capital structure is set at a mix of 40 percent debt and 60 percent equity. According to the traditional approach to capital structure, the value of the firm is

Accepted Answer

A)  $1.4 million. 
B)  $2.0 million. 
C)  $2.7 million. 
D)  $6.0 million. 
A)  $1.4 million. 
B)  $2.0 million. 
C)  $2.7 million. 
D)  $6.0 million.

Question 12

For sales levels below the operating breakeven point, sales revenue exceeds total operating costs, and earnings before interest and taxes is greater than zero.

Accepted Answer

A) True 
 B)False

Question 13

________ is the risk to the firm of being unable to cover operating costs.

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 14

The total leverage measures the combined effect of operating and financial leverage on the firm's risk.

Accepted Answer

A) True 
 B)False

Question 15

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.

Accepted Answer

A) True 
 B)False

Question 16

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 17

The optimal capital structure is the one that balances

Accepted Answer

A)  return and risk factors in order to maximize profits. 
B)  return and risk factors in order to maximize earnings per share. 
C)  return and risk factors in order to maximize market value. 
D)  return and risk factors in order to maximize dividends. 
A)  return and risk factors in order to maximize profits. 
B)  return and risk factors in order to maximize earnings per share. 
C)  return and risk factors in order to maximize market value. 
D)  return and risk factors in order to maximize dividends.

Question 18

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.

Accepted Answer

A) True 
 B)False

Question 19

The steeper the slope of the EBIT-EPS capital structure line, the lower the financial risk.

Accepted Answer

A) True 
 B)False

Question 20

Probability of bankruptcy is determined by

Accepted Answer

A)  financial risk. 
B)  total risk. 
C)  business risk. 
D)  interest rate risk. 
A)  financial risk. 
B)  total risk. 
C)  business risk. 
D)  interest rate risk.

The long-term funds of the firm are called

The levels of fixed-cost assets and funds that management selects affect the variability of returns.

Table 12.1 -What is the degree of financial leverage at a base level EBIT of $120,000 for both financing plans? The firm has a 40 percent tax rate. (See Table 12.1)

In theory, a firm's optimal capital structure is that which minimized the firm's overall cost of capital resulting in a maximization of the market value of the firm.

The higher the financial breakeven point and the steeper the slope of the capital structure line, the greater the financial risk.

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

The firm's capital structure can significantly affect the firm's value by affecting its risk and return.

Table 12.1 -At about what EBIT level should the financial manager be indifferent to either plan? (See Table 12.1)

The use of a dollar breakeven point is important when a firm has more than one product, especially when each product is selling at a different price.

For sales levels below the operating breakeven point, sales revenue exceeds total operating costs, and earnings before interest and taxes is greater than zero.

________ is the risk to the firm of being unable to cover operating costs.

The total leverage measures the combined effect of operating and financial leverage on the firm's risk.

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.

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

The optimal capital structure is the one that balances

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.

The steeper the slope of the EBIT-EPS capital structure line, the lower the financial risk.

Probability of bankruptcy is determined by

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

The long-term funds of the firm are called

The levels of fixed-cost assets and funds that management selects affect the variability of returns.

Table 12.1 -What is the degree of financial leverage at a base level EBIT of $120,000 for both financing plans? The firm has a 40 percent tax rate. (See Table 12.1)

In theory, a firm's optimal capital structure is that which minimized the firm's overall cost of capital resulting in a maximization of the market value of the firm.

The higher the financial breakeven point and the steeper the slope of the capital structure line, the greater the financial risk.

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

The firm's capital structure can significantly affect the firm's value by affecting its risk and return.

Table 12.1 -At about what EBIT level should the financial manager be indifferent to either plan? (See Table 12.1)

The use of a dollar breakeven point is important when a firm has more than one product, especially when each product is selling at a different price.

For sales levels below the operating breakeven point, sales revenue exceeds total operating costs, and earnings before interest and taxes is greater than zero.

________ is the risk to the firm of being unable to cover operating costs.

The total leverage measures the combined effect of operating and financial leverage on the firm's risk.

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.

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

The optimal capital structure is the one that balances

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.

The steeper the slope of the EBIT-EPS capital structure line, the lower the financial risk.

Probability of bankruptcy is determined by

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