Question 1

In finding the operating breakeven point,it is important to divide the cost of goods sold and operating expenses into fixed and variable operating costs.

Accepted Answer

A) True 
 B)False

Question 2

Operating leverage results from the existence of operating costs in a firm's income stream.

Accepted Answer

A) True 
 B)False

Question 3

The degree of financial leverage is the ratio of ________ to percentage change in EBIT.

Accepted Answer

A) operating profit 
B) percentage change in sales 
C) percentage change in EPS 
D) long-term debt 
A) operating profit 
B) percentage change in sales 
C) percentage change in EPS 
D) long-term debt

Question 4

In the traditional approach to capital structure,as the amount of debt increases in a firm's capital structure,________.

Accepted Answer

A) the cost of equity rises faster than the cost of debt 
B) the cost of debt rises faster than the cost of equity 
C) debt becomes less risky 
D) equity cost is unaffected 
A) the cost of equity rises faster than the cost of debt 
B) the cost of debt rises faster than the cost of equity 
C) debt becomes less risky 
D) equity cost is unaffected

Question 5

In theory,a firm should maintain financial leverage consistent with a capital structure that ________.

Accepted Answer

A) meets the industry standards 
B) meets the investor expectations 
C) maximizes the owner's wealth 
D) maximizes dividends 
A) meets the industry standards 
B) meets the investor expectations 
C) maximizes the owner's wealth 
D) maximizes dividends

Question 6

In general,a firm's theoretical optimal capital structure is that which balances the tax benefits of equity financing against the increase probability of bankruptcy that results from its use.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

The EBIT-EPS analysis tends to concentrate on maximization of earnings rather than maximization of owners' wealth.

Accepted Answer

A) True 
 B)False

Question 9

________ leverage is concerned with the relationship between sales revenue and earnings per share.

Accepted Answer

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

Question 10

Business risk is the risk that is reflected in fluctuations of the firm's cash flows before considering any debt financing.

Accepted Answer

A) True 
 B)False

Question 11

Which plan has a higher degree of financial leverage and financial risk? (See Table 13.1)

Accepted Answer

Financing Plan 2 has

Question 12

A shift toward more fixed costs increases business risk,which in turn causes earnings before interest and taxes to increase by less for a given increase in sales.

Accepted Answer

A) True 
 B)False

Question 13

________ leverage measures the effect of fixed ________ costs on the relationship between EBIT and EPS.

Accepted Answer

A) Operating; operating 
B) Financial; financial 
C) Operating; financial 
D) Financial; operating 
A) Operating; operating 
B) Financial; financial 
C) Operating; financial 
D) Financial; operating

Question 14

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.If the interest rate on debt is 7 percent and 9 percent for the 30 percent and the 50 percent debt ratios,respectively,the amount of interest on the debt under each of the capital structures being considered would be ________.

Accepted Answer

A) 30 percent debt ratio: $105,000 and 50 percent debt ratio: $225,000 
B) 30 percent debt ratio: $245,000 and 50 percent debt ratio: $225,000 
C) 30 percent debt ratio: $105,000 and 50 percent debt ratio: $250,000 
D) 30 percent debt ratio: $135,000 and 50 percent debt ratio: $175,000 
A) 30 percent debt ratio: $105,000 and 50 percent debt ratio: $225,000 
B) 30 percent debt ratio: $245,000 and 50 percent debt ratio: $225,000 
C) 30 percent debt ratio: $105,000 and 50 percent debt ratio: $250,000 
D) 30 percent debt ratio: $135,000 and 50 percent debt ratio: $175,000

Question 15

The cost of equity is greater than the cost of debt and increases with increasing financial leverage,but generally less rapidly than the cost of debt.

Accepted Answer

A) True 
 B)False

Question 16

Table 13.1  
-What is the EPS under Financing Plan 1,if the firm projects EBIT of $200,000 and has a tax rate of 21 percent? (See Table 13.1)

Accepted Answer

Calculate the EPS wi

Question 17

In theory,a firm's optimal capital structure is that which minimized the firm's overall cost of capital resulting in a maximization of the market value of a firm.

Accepted Answer

A) True 
 B)False

Question 18

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 dollars is ________.

Accepted Answer

A) $125,495 
B) $112,425 
C) $108,995 
D) $110,495 
A) $125,495 
B) $112,425 
C) $108,995 
D) $110,495

Question 19

A firm's ________ is the mix of long-term debt and equity utilized by the firm,which may significantly affect its value by affecting return and risk.

Accepted Answer

A) dividend policy 
B) capital budget 
C) capital structure 
D) working capital 
A) dividend policy 
B) capital budget 
C) capital structure 
D) working capital

Question 20

Earnings before interest and taxes are positive above the operating breakeven point,and a loss occurs below it.

Accepted Answer

A) True 
 B)False

In finding the operating breakeven point,it is important to divide the cost of goods sold and operating expenses into fixed and variable operating costs.

Operating leverage results from the existence of operating costs in a firm's income stream.

The degree of financial leverage is the ratio of ________ to percentage change in EBIT.

In the traditional approach to capital structure,as the amount of debt increases in a firm's capital structure,________.

In theory,a firm should maintain financial leverage consistent with a capital structure that ________.

In general,a firm's theoretical optimal capital structure is that which balances the tax benefits of equity financing against the increase probability of bankruptcy that results from its use.

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

The EBIT-EPS analysis tends to concentrate on maximization of earnings rather than maximization of owners' wealth.

________ leverage is concerned with the relationship between sales revenue and earnings per share.

Business risk is the risk that is reflected in fluctuations of the firm's cash flows before considering any debt financing.

Which plan has a higher degree of financial leverage and financial risk? (See Table 13.1)

A shift toward more fixed costs increases business risk,which in turn causes earnings before interest and taxes to increase by less for a given increase in sales.

leverage measures the effect of fixed costs on the relationship between EBIT and EPS.

The cost of equity is greater than the cost of debt and increases with increasing financial leverage,but generally less rapidly than the cost of debt.

Table 13.1 -What is the EPS under Financing Plan 1,if the firm projects EBIT of $200,000 and has a tax rate of 21 percent? (See Table 13.1)

In theory,a firm's optimal capital structure is that which minimized the firm's overall cost of capital resulting in a maximization of the market value of a firm.

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 dollars is ________.

A firm's ________ is the mix of long-term debt and equity utilized by the firm,which may significantly affect its value by affecting return and risk.

Earnings before interest and taxes are positive above the operating breakeven point,and a loss occurs below it.

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

In finding the operating breakeven point,it is important to divide the cost of goods sold and operating expenses into fixed and variable operating costs.

Operating leverage results from the existence of operating costs in a firm's income stream.

The degree of financial leverage is the ratio of ________ to percentage change in EBIT.

In the traditional approach to capital structure,as the amount of debt increases in a firm's capital structure,________.

In theory,a firm should maintain financial leverage consistent with a capital structure that ________.

In general,a firm's theoretical optimal capital structure is that which balances the tax benefits of equity financing against the increase probability of bankruptcy that results from its use.

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

The EBIT-EPS analysis tends to concentrate on maximization of earnings rather than maximization of owners' wealth.

________ leverage is concerned with the relationship between sales revenue and earnings per share.

Business risk is the risk that is reflected in fluctuations of the firm's cash flows before considering any debt financing.

Which plan has a higher degree of financial leverage and financial risk? (See Table 13.1)

A shift toward more fixed costs increases business risk,which in turn causes earnings before interest and taxes to increase by less for a given increase in sales.

________ leverage measures the effect of fixed ________ costs on the relationship between EBIT and EPS.

The cost of equity is greater than the cost of debt and increases with increasing financial leverage,but generally less rapidly than the cost of debt.

Table 13.1 -What is the EPS under Financing Plan 1,if the firm projects EBIT of $200,000 and has a tax rate of 21 percent? (See Table 13.1)

In theory,a firm's optimal capital structure is that which minimized the firm's overall cost of capital resulting in a maximization of the market value of a firm.

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 dollars is ________.

A firm's ________ is the mix of long-term debt and equity utilized by the firm,which may significantly affect its value by affecting return and risk.

Earnings before interest and taxes are positive above the operating breakeven point,and a loss occurs below it.

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

leverage measures the effect of fixed costs on the relationship between EBIT and EPS.