Exam 12: Leverage and Capital Structure

Financial leverage measures the effect of fixed financial costs on the relationship between ________.

________ analysis is a technique used to assess the returns associated with various cost structures and levels of sales.

A decrease in the use of financing that requires fixed payments will result in a(n)________.

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.

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.Assuming this as the optimum capital structure,the value of the firm is ________.

The value of a firm at optimum capital structure is computed as ________.

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.

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

In case of a manufacturing organization,which of the following is a variable cost that varies directly with the sales volume?

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

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

Beginning with a zero-leverage company,as debt is substituted for equity in the capital structure ________.

A firm has fixed operating costs of $25,000,a per unit sales price of $5,and a variable cost per unit of $3.What is its operating breakeven point if it targets net operating income of $10,000?

A decrease in fixed operating costs will result in ________ in the degree of financial leverage.

If a firm's sale price per unit decreases,the firm's ________.

A firm has EBIT of $375,000,interest expense of $75,000,preferred dividends of $6,000 and a tax rate of 40 percent.The firm's degree of financial leverage at a base EBIT level of $375,000 is ________.

A firm has a current capital structure consisting of $400,000 of 6 percent annual interest debt and 50,000 shares of common stock.The firm's tax rate is 21 percent on ordinary income.If the EBIT is expected to be $200,000,two EBIT-EPS coordinates for the firm's existing capital structure are ________.

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.

The major shortcoming of the EBIT-EPS approach to capital structure is that ________.

Generally,decreases in leverage result in increased return and risk,whereas increases in leverage result in decreased return and risk.