Exam 12: Leverage and Capital Structure

Holding all other factors constant,a firm that is subject to a greater level of business risk should employ more operating leverage than an otherwise equivalent firm that is subject to a lesser level of business risk.

Through the effects of financial leverage,when EBIT increases,________.

A corporation borrows $1,000,000 at 10 percent annual rate of interest.The firm has a 21 percent tax rate.The yearly,after-tax cost of this debt is ________.

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

The relationship between operating and financial leverage is additive rather than multiplicative.

Bamboo manufacturing sells its finished product for an average of $35 per unit with a variable cost per unit of $21.The company has fixed operating costs of $1,050,000. (a)Calculate the firm's operating breakeven point in units. (b)Calculate the firm's operating breakeven point in dollars. (c)Using 100,000 units as a base,what is the firm's degree of operating leverage?

Yongman Electronics has decided to invest $10,000,000 in a new headquarters and needs to determine the best way to finance the construction.The firm currently has $50,000,000 of 10 percent bonds and 4,000,000 common shares outstanding.The firm can obtain the $10,000,000 of financing through a 10 percent bond issue or the sale of 1,000,000 shares of common stock.The firm has a 40 percent tax rate. (a)What is the degree of financial leverage for each plan at $25,000,000 of EBIT? (b)What is the financial breakeven point for each plan?

The degree of operating leverage depends on the base level of sales used as a point of reference.The closer the base sales level used is to the operating breakeven point,the greater the operating leverage.

Operating leverage measures the effect of fixed operating costs on the relationship between ________.

Leverage results from the use of equity to magnify returns to a firm's owners.

Holding all other factors constant,a firm that is subject to a greater level of business risk should employ more financial leverage than an otherwise equivalent firm that is subject to a lesser level of business risk.

In general,non-U.S.companies have much higher debt ratios than their U.S.counterparts because financial markets are much more developed in the United States than elsewhere.

An increase in fixed operating costs will result in ________.

With the existence of fixed operating costs,an increase in sales will result in ________ increase in EBIT.

Which of the following affects business risk?

________ refers to the effects that fixed costs have on the returns that shareholders earn.

Business risk is the risk to the firm of being unable to cover required financial obligations.

An increase in fixed operating and financial cost results in an increase in risk,since the firm will have to achieve a higher level of sales just to break even.

Due to the difficulty of allocating costs to products in a multiproduct firm,the breakeven model may fail to determine breakeven points for each product line.

At a base sales level of $400,000,a firm has a degree of operating leverage of 2 and a degree of financial leverage of 1.5.The firm's degree of total leverage is ________.