Question 1

________ is 100 percent minus total variable operating costs as a percentage of total sales.

Accepted Answer

A) Profit margin 
B) Contribution margin 
C) Expense ratio 
D) Fixed coverage ratio 
A) Profit margin 
B) Contribution margin 
C) Expense ratio 
D) Fixed coverage ratio

Question 2

At the operating breakeven point,the sales revenue is equal to the sum of the fixed and variable operating costs.

Accepted Answer

A) True 
 B)False

Question 3

A major assumption of breakeven analysis and one which causes severe limitations in its use is that ________.

Accepted Answer

A) fixed costs really are fixed 
B) total revenue is nonlinear 
C) revenues and operating costs are linear 
D) all costs are really semivariable 
A) fixed costs really are fixed 
B) total revenue is nonlinear 
C) revenues and operating costs are linear 
D) all costs are really semivariable

Question 4

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

Accepted Answer

A) decrease 
B) increase 
C) remain unchanged 
D) change based on the sale price per unit 
A) decrease 
B) increase 
C) remain unchanged 
D) change based on the sale price per unit

Question 5

According to the traditional approach to capital structure,the value of a 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 6

Which of the following is a fixed cost?

Accepted Answer

A) inventory 
B) rent 
C) delivery costs 
D) direct labor 
A) inventory 
B) rent 
C) delivery costs 
D) direct labor

Question 7

Operating and financial constraints placed on a corporation by loan provision are ________.

Accepted Answer

A) agency costs to lenders 
B) agency costs to a firm 
C) necessary to regulate ownership of a firm 
D) necessary to control the risk of a firm 
A) agency costs to lenders 
B) agency costs to a firm 
C) necessary to regulate ownership of a firm 
D) necessary to control the risk of a firm

Question 8

Carol's Dolls has fixed operating costs of $25,000.Its sale price is $55 per doll,and its variable operating cost is $30 per doll.It sells 3,000 dolls per month.The firm's earnings before interest and taxes is ________.

Accepted Answer

A) $37,500 
B) $55,000 
C) $75,000 
D) $50,000 
A) $37,500 
B) $55,000 
C) $75,000 
D) $50,000

Question 9

Tony's Beach T-Shirts has fixed annual operating costs of $75,000.Tony retails his T-shirts for $14.99 each and the variable cost per T-shirt is $4.99.Based on this information,the breakeven sales level in units is ________.

Accepted Answer

A) 7,500 
B) 15,030 
C) 5,003 
D) 3,754 
A) 7,500 
B) 15,030 
C) 5,003 
D) 3,754

Question 10

The basic shortcoming of EBIT-EPS analysis is that this model focuses on the maximization of earnings rather than on the maximization of owner wealth as reflected in a firm's stock price.

Accepted Answer

A) True 
 B)False

Question 11

All items on the right-hand side of a firm's balance sheet,excluding current liabilities are sources of capital.

Accepted Answer

A) True 
 B)False

Question 12

A firm is analyzing two possible capital structures-30 and 50 percent debt ratios.The firm has total assets of $5,000,000 and common stock valued at $50 per share.The firm has a marginal tax rate of 40 percent on ordinary income.The number of common shares outstanding for each of the capital structures would be ________.

Accepted Answer

A) 30 percent debt ratio: 30,000 shares and 50 percent debt ratio: 50,000 shares 
B) 30 percent debt ratio: 50,000 shares and 50 percent debt ratio: 70,000 shares 
C) 30 percent debt ratio: 70,000 shares and 50 percent debt ratio: 100,000 shares 
D) 30 percent debt ratio: 70,000 shares and 50 percent debt ratio: 50,000 shares 
A) 30 percent debt ratio: 30,000 shares and 50 percent debt ratio: 50,000 shares 
B) 30 percent debt ratio: 50,000 shares and 50 percent debt ratio: 70,000 shares 
C) 30 percent debt ratio: 70,000 shares and 50 percent debt ratio: 100,000 shares 
D) 30 percent debt ratio: 70,000 shares and 50 percent debt ratio: 50,000 shares

Question 13

The asymmetric information explanation of capital structure suggests that firms will issue new equity only when the managers believe the firm's stock is overvalued; as a result,issuing new equity is considered a negative signal that will result in a decline in share price.

Accepted Answer

A) True 
 B)False

________ is 100 percent minus total variable operating costs as a percentage of total sales.

At the operating breakeven point,the sales revenue is equal to the sum of the fixed and variable operating costs.

A major assumption of breakeven analysis and one which causes severe limitations in its use is that ________.

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

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

Which of the following is a fixed cost?

Operating and financial constraints placed on a corporation by loan provision are ________.

Carol's Dolls has fixed operating costs of $25,000.Its sale price is $55 per doll,and its variable operating cost is $30 per doll.It sells 3,000 dolls per month.The firm's earnings before interest and taxes is ________.

Tony's Beach T-Shirts has fixed annual operating costs of $75,000.Tony retails his T-shirts for $14.99 each and the variable cost per T-shirt is $4.99.Based on this information,the breakeven sales level in units is ________.

The basic shortcoming of EBIT-EPS analysis is that this model focuses on the maximization of earnings rather than on the maximization of owner wealth as reflected in a firm's stock price.

All items on the right-hand side of a firm's balance sheet,excluding current liabilities are sources of capital.

The asymmetric information explanation of capital structure suggests that firms will issue new equity only when the managers believe the firm's stock is overvalued; as a result,issuing new equity is considered a negative signal that will result in a decline in share price.

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

________ is 100 percent minus total variable operating costs as a percentage of total sales.

At the operating breakeven point,the sales revenue is equal to the sum of the fixed and variable operating costs.

A major assumption of breakeven analysis and one which causes severe limitations in its use is that ________.

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

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

Which of the following is a fixed cost?

Operating and financial constraints placed on a corporation by loan provision are ________.

Carol's Dolls has fixed operating costs of $25,000.Its sale price is $55 per doll,and its variable operating cost is $30 per doll.It sells 3,000 dolls per month.The firm's earnings before interest and taxes is ________.

Tony's Beach T-Shirts has fixed annual operating costs of $75,000.Tony retails his T-shirts for $14.99 each and the variable cost per T-shirt is $4.99.Based on this information,the breakeven sales level in units is ________.

The basic shortcoming of EBIT-EPS analysis is that this model focuses on the maximization of earnings rather than on the maximization of owner wealth as reflected in a firm's stock price.

All items on the right-hand side of a firm's balance sheet,excluding current liabilities are sources of capital.

The asymmetric information explanation of capital structure suggests that firms will issue new equity only when the managers believe the firm's stock is overvalued; as a result,issuing new equity is considered a negative signal that will result in a decline in share price.

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