Exam 12: Leverage and Capital Structure

The base level of sales must be held constant to compare the total leverage associated with different levels of fixed costs.

Comparison of the degree of operating leverage of two firms is valid only when the base level of sales used for each firm is the same.

Whenever the percentage change in earnings before interest and taxes resulting from a given percentage change in sales is greater than the percentage change in sales,operating leverage exists.

As fixed operating costs increase and all other factors are held constant,________.

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

The pecking order theory describes a hierarchy of financing beginning with retained earnings,followed by debt financing,and finally external equity financing.

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

One of the limitations of breakeven analysis is its short-term time horizon.A large outlay in the current financial period could significantly raise the firm's breakeven point,while the benefits may occur over a period of years.

With the existence of fixed operating costs,a decrease in sales will result in ________ in EBIT.

Table 13.1 -Assuming a 21 percent tax rate,what is the financial breakeven point for each plan? (See Table 13.1)

Because risk premiums increase with increases in financial leverage,maximizing EPS does not assure owners' wealth maximization.

Effective capital structure decisions can lower the cost of capital,resulting in higher NPVs and more acceptable projects,thereby increasing the value of a firm.

The EBIT-EPS approach to capital structure proposes that an optimal capital structure be selected which ________.

Which of the following is a basic source of capital for a firm?

The amount of leverage in a firm's capital structure-the mix of long-term debt and equity maintained by the firm-can significantly affect its value by affecting return and risk.

________ costs are a function of time,not sales,and are typically contractual.

As financial leverage increases,the cost of debt initially remains constant and then rises,while the cost of equity always rises.

The preferred approach to breakeven analysis for a multiproduct firm is the ________.

Generally,the greater a firm's times interest earned ratio,the less able it is to meet payments as they come due.

If a firm's fixed operating costs decrease,the firm's ________.