Question 1

Generally,increases in leverage result in ________ return and ________ risk.

Accepted Answer

A) decreased; increased 
B) decreased; decreased 
C) increased; increased 
D) increased; decreased 
A) decreased; increased 
B) decreased; decreased 
C) increased; increased 
D) increased; decreased C

Question 2

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  False

Question 3

________ is the potential use of fixed operating costs to magnify the effects of changes in sales on earnings before interest and taxes.

Accepted Answer

A) Financial leverage 
B) Operating leverage 
C) Operating budget 
D) Ratio analysis 
A) Financial leverage 
B) Operating leverage 
C) Operating budget 
D) Ratio analysis B

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

The effect of financial leverage is such that an increase in a 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 6

A firm's capital structure is the mix of short-term liabilities and long-term debt.

Accepted Answer

A) True 
 B)False

Question 7

The inexpensive nature of long-term debt in a firm's capital structure is partly because ________.

Accepted Answer

A) the debt holders are the true owners of the firm 
B) equity capital has a fixed return 
C) long-term debt has a fixed return and a maturity date 
D) dividend payments are tax-deductible 
A) the debt holders are the true owners of the firm 
B) equity capital has a fixed return 
C) long-term debt has a fixed return and a maturity date 
D) dividend payments are tax-deductible

Question 8

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

Accepted Answer

A) Long-term debt 
B) Equity 
C) Leverage 
D) Capital structure 
A) Long-term debt 
B) Equity 
C) Leverage 
D) Capital structure

Question 9

Financial leverage is concerned with the relationship between a firm's earnings after interest and taxes and its common stock earnings per share.

Accepted Answer

A) True 
 B)False

Question 10

Firms having stable and predictable revenues can more safely employ highly leveraged capital structures than can firms with volatile patterns of sales revenue.

Accepted Answer

A) True 
 B)False

Question 11

After satisfying obligations to creditors,the government,and preferred stockholders,any remaining earnings will most likely be allocated to ________.

Accepted Answer

A) common shareholders as cash dividends 
B) common shareholders as stock dividends 
C) other firms requiring capital 
D) pay future preferred dividends 
A) common shareholders as cash dividends 
B) common shareholders as stock dividends 
C) other firms requiring capital 
D) pay future preferred dividends

Question 12

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 13

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

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) Investing 
B) Operating 
C) Variable 
D) Total 
A) Investing 
B) Operating 
C) Variable 
D) Total

Question 15

The inexpensive nature of long-term debt in a firm's capital structure is partly because ________.

Accepted Answer

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

Question 16

The higher the degree of financial leverage (DFL),the greater the leverage a given financing plan has,and the steeper its slope when plotted on EBIT-EPS axes.

Accepted Answer

A) True 
 B)False

Question 17

Harry Trading Company must choose its optimal capital structure.Currently,the firm has a 20 percent debt ratio and the firm expects to generate a dividend next year of $5.44 per share.Dividends are expected to remain at this level indefinitely.Stockholders currently require a 12.1 percent return on their investment.Harry is considering changing its capital structure if it would benefit shareholders.The firm estimates that if it increases the debt ratio to 30 percent,it will increase its expected dividend to $5.82 per share.Again,dividends are expected to remain at this new level indefinitely.However,because of the added risk,the required return demanded by stockholders will increase to 12.6 percent.Based on this information,should Harry make the change?

Accepted Answer

A) Yes,since the value of the firm will increase by $1.23 per share. 
B) No,since the value of the firm will decrease by $1.23 per share. 
C) Yes,since the value of the firm will increase by $0.25 per share. 
D) No,since the value of the firm will decrease by $0.25 per share. 
A) Yes,since the value of the firm will increase by $1.23 per share. 
B) No,since the value of the firm will decrease by $1.23 per share. 
C) Yes,since the value of the firm will increase by $0.25 per share. 
D) No,since the value of the firm will decrease by $0.25 per share.

Question 18

If we assume that EBIT is constant,the value of a firm is maximized by minimizing the weighted average cost of capital.

Accepted Answer

A) True 
 B)False

Question 19

A firm has fixed operating costs of $253,750,a sales price per unit of $100,and a variable cost per unit of $65.The firm's operating breakeven point in dollars is ________.

Accepted Answer

A) $725,000 
B) $700,000 
C) $906,250 
D) $390,385 
A) $725,000 
B) $700,000 
C) $906,250 
D) $390,385

Question 20

The inexpensive nature of long-term debt in a firm's capital structure is partly because ________.

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

Generally,increases in leverage result in return and risk.

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 potential use of fixed operating costs to magnify the effects of changes in sales on earnings before interest and taxes.

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

The effect of financial leverage is such that an increase in a 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's capital structure is the mix of short-term liabilities and long-term debt.

The inexpensive nature of long-term debt in a firm's capital structure is partly because ________.

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

Financial leverage is concerned with the relationship between a firm's earnings after interest and taxes and its common stock earnings per share.

Firms having stable and predictable revenues can more safely employ highly leveraged capital structures than can firms with volatile patterns of sales revenue.

After satisfying obligations to creditors,the government,and preferred stockholders,any remaining earnings will most likely be allocated 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.

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

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

The inexpensive nature of long-term debt in a firm's capital structure is partly because ________.

The higher the degree of financial leverage (DFL),the greater the leverage a given financing plan has,and the steeper its slope when plotted on EBIT-EPS axes.

If we assume that EBIT is constant,the value of a firm is maximized by minimizing the weighted average cost of capital.

A firm has fixed operating costs of $253,750,a sales price per unit of $100,and a variable cost per unit of $65.The firm's operating breakeven point in dollars is ________.

The inexpensive nature of long-term debt in a firm's capital structure is partly because ________.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Long- and Short-Term 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

Generally,increases in leverage result in ________ return and ________ risk.

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 potential use of fixed operating costs to magnify the effects of changes in sales on earnings before interest and taxes.

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

The effect of financial leverage is such that an increase in a 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's capital structure is the mix of short-term liabilities and long-term debt.

The inexpensive nature of long-term debt in a firm's capital structure is partly because ________.

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

Financial leverage is concerned with the relationship between a firm's earnings after interest and taxes and its common stock earnings per share.

Firms having stable and predictable revenues can more safely employ highly leveraged capital structures than can firms with volatile patterns of sales revenue.

After satisfying obligations to creditors,the government,and preferred stockholders,any remaining earnings will most likely be allocated 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.

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

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

The inexpensive nature of long-term debt in a firm's capital structure is partly because ________.

The higher the degree of financial leverage (DFL),the greater the leverage a given financing plan has,and the steeper its slope when plotted on EBIT-EPS axes.

If we assume that EBIT is constant,the value of a firm is maximized by minimizing the weighted average cost of capital.

A firm has fixed operating costs of $253,750,a sales price per unit of $100,and a variable cost per unit of $65.The firm's operating breakeven point in dollars is ________.

The inexpensive nature of long-term debt in a firm's capital structure is partly because ________.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Long- and Short-Term 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

Generally,increases in leverage result in return and risk.