Question 1

One function of breakeven analysis is to

Accepted Answer

A)  create profits. 
B)  describe leverage. 
C)  evaluate the profitability of various sales levels. 
D)  determine the amount of financing needed by the firm. 
A)  create profits. 
B)  describe leverage. 
C)  evaluate the profitability of various sales levels. 
D)  determine the amount of financing needed by the firm.

Question 2

Whenever the percentage change in earnings per share (EPS) resulting from a given percentage change in sales is greater than the percentage change in sales, financial leverage exists.

Accepted Answer

A) True 
 B)False

Question 3

The degree of operating leverage will increase if a firm decides to compensate its sales representatives with a fixed salary and bonus rather than with a pure percent-of-sales commission.

Accepted Answer

A) True 
 B)False

Question 4

In order to enhance the wealth of stockholders and to send positive signals to the market, corporations generally raise funds using the following order:

Accepted Answer

A)  retained earnings, equity, debt. 
B)  retained earnings, debt, equity. 
C)  debt, retained earnings, equity. 
D)  equity, retained earnings, debt. 
A)  retained earnings, equity, debt. 
B)  retained earnings, debt, equity. 
C)  debt, retained earnings, equity. 
D)  equity, retained earnings, debt.

Question 5

The three basic types of leverage are

Accepted Answer

A)  operating, production, and financial. 
B)  operating, production, and total. 
C)  production, financial, and total. 
D)  operating, financial, and total. 
A)  operating, production, and financial. 
B)  operating, production, and total. 
C)  production, financial, and total. 
D)  operating, financial, and total.

Question 6

The basic shortcoming of the EBIT-EPS approach to capital structure is

Accepted Answer

A)  that the optimal capital structure is difficult to compute. 
B)  its disregard for the presence of preferred stock in the capital structure. 
C)  its disregard for the firm's dividend policy. 
D)  that it concentrates on the maximization of EPS rather than the maximization of owner's wealth. 
A)  that the optimal capital structure is difficult to compute. 
B)  its disregard for the presence of preferred stock in the capital structure. 
C)  its disregard for the firm's dividend policy. 
D)  that it concentrates on the maximization of EPS rather than the maximization of owner's wealth.

Question 7

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

Accepted Answer

A)  finance with new common stock if management believes the firm is undervalued. 
B)  finance with debt if management believes the firm is undervalued. 
C)  finance with debt if management believes the firm is overvalued. 
D)  finance with preferred stock if the firm is at value. 
A)  finance with new common stock if management believes the firm is undervalued. 
B)  finance with debt if management believes the firm is undervalued. 
C)  finance with debt if management believes the firm is overvalued. 
D)  finance with preferred stock if the firm is at value.

Question 8

As fixed operating costs increase and all other factors are held constant, the degree of operating leverage will

Accepted Answer

A)  increase. 
B)  decrease. 
C)  remain unchanged. 
D)  change in an undetermined direction. 
A)  increase. 
B)  decrease. 
C)  remain unchanged. 
D)  change in an undetermined direction.

Question 9

Financial leverage results from the presence of variable financial costs in the firm's income stream.

Accepted Answer

A) True 
 B)False

Question 10

________ risk is the risk of being unable to cover financial costs.

Accepted Answer

A)  Business 
B)  Financial 
C)  Total 
D)  Leverage 
A)  Business 
B)  Financial 
C)  Total 
D)  Leverage

Question 11

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

Accepted Answer

A)  Sales and EBIT. 
B)  Sales and EPS. 
C)  EBIT and EPS. 
D)  none of the above. 
A)  Sales and EBIT. 
B)  Sales and EPS. 
C)  EBIT and EPS. 
D)  none of the above.

Question 12

________ is the potential use of fixed costs, both operating and financial, to magnify the effect of changes in sales on the firm's earnings per share.

Accepted Answer

A)  Debt service 
B)  Total leverage 
C)  Operating leverage 
D)  Financial leverage 
A)  Debt service 
B)  Total leverage 
C)  Operating leverage 
D)  Financial leverage

Question 13

If a firm's fixed operating costs decrease, 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 14

________ is the potential use of fixed financial charges to magnify the effects of changes in earnings before interest and taxes on the firm's earnings per share.

Accepted Answer

A)  Financial leverage 
B)  Operating leverage 
C)  Total leverage 
D)  Debt service 
A)  Financial leverage 
B)  Operating leverage 
C)  Total leverage 
D)  Debt service

Question 15

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

Accepted Answer

A)  Sales and EBIT. 
B)  Sales and EPS. 
C)  EBIT and EPS. 
D)  none of the above. 
A)  Sales and EBIT. 
B)  Sales and EPS. 
C)  EBIT and EPS. 
D)  none of the above.

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

The lower risk nature of long-term debt in a firm's capital structure is due to the fact that

Accepted Answer

A)  the equity holders are the true owners of the firm. 
B)  equity capital has a fixed return. 
C)  creditors have a higher position in the priority of claims. 
D)  dividend payments are tax-deductible. 
A)  the equity holders are the true owners of the firm. 
B)  equity capital has a fixed return. 
C)  creditors have a higher position in the priority of claims. 
D)  dividend payments are tax-deductible.

Question 18

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 ________.

Accepted Answer

A)  $2.40 
B)  $3.04 
C)  $7.04 
D)  $1.82 
A)  $2.40 
B)  $3.04 
C)  $7.04 
D)  $1.82

Question 19

All of the following affect business risk EXCEPT

Accepted Answer

A)  operating leverage. 
B)  interest rate stability. 
C)  cost stability. 
D)  revenue stability. 
A)  operating leverage. 
B)  interest rate stability. 
C)  cost stability. 
D)  revenue stability.

Question 20

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

Accepted Answer

A) True 
 B)False

One function of breakeven analysis is to

Whenever the percentage change in earnings per share (EPS) resulting from a given percentage change in sales is greater than the percentage change in sales, financial leverage exists.

The degree of operating leverage will increase if a firm decides to compensate its sales representatives with a fixed salary and bonus rather than with a pure percent-of-sales commission.

In order to enhance the wealth of stockholders and to send positive signals to the market, corporations generally raise funds using the following order:

The three basic types of leverage are

The basic shortcoming of the EBIT-EPS approach to capital structure is

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

As fixed operating costs increase and all other factors are held constant, the degree of operating leverage will

Financial leverage results from the presence of variable financial costs in the firm's income stream.

________ risk is the risk of being unable to cover financial costs.

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

________ is the potential use of fixed costs, both operating and financial, to magnify the effect of changes in sales on the firm's earnings per share.

If a firm's fixed operating costs decrease, the firm's operating breakeven point will

________ is the potential use of fixed financial charges to magnify the effects of changes in earnings before interest and taxes on the firm's earnings per share.

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

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

The lower risk nature of long-term debt in a firm's capital structure is due to the fact that

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 ________.

All of the following affect business risk EXCEPT

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

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

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Exam 12: Leverage and Capital Structure

One function of breakeven analysis is to

Whenever the percentage change in earnings per share (EPS) resulting from a given percentage change in sales is greater than the percentage change in sales, financial leverage exists.

The degree of operating leverage will increase if a firm decides to compensate its sales representatives with a fixed salary and bonus rather than with a pure percent-of-sales commission.

In order to enhance the wealth of stockholders and to send positive signals to the market, corporations generally raise funds using the following order:

The three basic types of leverage are

The basic shortcoming of the EBIT-EPS approach to capital structure is

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

As fixed operating costs increase and all other factors are held constant, the degree of operating leverage will

Financial leverage results from the presence of variable financial costs in the firm's income stream.

________ risk is the risk of being unable to cover financial costs.

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

________ is the potential use of fixed costs, both operating and financial, to magnify the effect of changes in sales on the firm's earnings per share.

If a firm's fixed operating costs decrease, the firm's operating breakeven point will

________ is the potential use of fixed financial charges to magnify the effects of changes in earnings before interest and taxes on the firm's earnings per share.

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

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

The lower risk nature of long-term debt in a firm's capital structure is due to the fact that

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 ________.

All of the following affect business risk EXCEPT

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

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