Question 1

Revenue stability affects ________.

Accepted Answer

A) dividend risk 
B) maturity risk 
C) business risk 
D) interest rate risk 
A) dividend risk 
B) maturity risk 
C) business risk 
D) interest rate risk

Question 2

Financial risk refers to fluctuations in a firm's cash flows that occur because the firm uses financing sources like debt and preferred stock.

Accepted Answer

A) True 
 B)False

Question 3

________ is the potential use of fixed financial charges to magnify the effects of changes in earnings before interest and taxes on a firm's earnings per share.

Accepted Answer

A) Financial leverage 
B) Operating leverage 
C) Total leverage 
D) Degree of operating leverage 
A) Financial leverage 
B) Operating leverage 
C) Total leverage 
D) Degree of operating leverage

Question 4

A firm's capital structure is the mix of the current liabilities,long-term debt,and equity maintained by the firm.

Accepted Answer

A) True 
 B)False

Question 5

Debt capital is less risky than equity capital because a firm is legally obligated to pay interest to bondholders but they are not legally obligated to pay dividends to preferred or common stockholders.

Accepted Answer

A) True 
 B)False

Question 6

The reason why maximizing share value and maximizing EPS do not give the same optimal capital structure is because ________.

Accepted Answer

A) EPS maximization does not consider risk 
B) share value maximization does not consider risk 
C) EPS maximization considers cash flows 
D) EPS maximization does consider risk 
A) EPS maximization does not consider risk 
B) share value maximization does not consider risk 
C) EPS maximization considers cash flows 
D) EPS maximization does consider risk

Question 7

Generally,increases in leverage result in increased return and risk.

Accepted Answer

A) True 
 B)False

Question 8

________ is the potential use of fixed costs to magnify the effect of changes in sales on the firm's earnings per share.

Accepted Answer

A) Investing leverage 
B) Total leverage 
C) Operating leverage 
D) Financial leverage 
A) Investing leverage 
B) Total leverage 
C) Operating leverage 
D) Financial leverage

Question 9

Frankline Coin,Inc.is considering two capital structures.The key information follows.Assume a 40 percent tax rate and expected EBIT of $50,000.   (a)Calculate two EBIT-EPS coordinates for each of the structures.
(b)Indicate over what EBIT range,if any,each structure is preferred.

Accepted Answer

(a) @#IMG-DLM& (b)Calculation of indifference poin

Question 10

If a firm's variable costs per unit increase,the firm's ________.

Accepted Answer

A) financial breakeven point will decrease 
B) operating breakeven point will increase 
C) sale price per unit will decrease 
D) fixed costs per unit will increase 
A) financial breakeven point will decrease 
B) operating breakeven point will increase 
C) sale price per unit will decrease 
D) fixed costs per unit will increase

Question 11

Table 13.1  
-What is the degree of financial leverage at a base level EBIT of $120,000 for both financing plans? The firm has a 21 percent tax rate.(See Table 13.1)

Accepted Answer

Degree of financial leverage f

Question 12

China America Manufacturing is evaluating two different operating structures which are described below.The firm has annual interest expense of $250,common shares outstanding of 1,000,and a tax rate of 40 percent.   (a)For each operating structure,calculate
(a1)EBIT and EPS at 10,000,20,000,and 30,000 units.
(a2)the degree of operating leverage (DOL)and degree of total leverage (DTL)using 20,000 units as a base sales level.
(a3)the operating breakeven point in units.
(b)Which operating structure has greater operating leverage and business risk?
(c)If China America projects sales of 20,000 units,which operating structure is recommended?

Accepted Answer

(a1) @#IMG-DLM& (a2)and (a3) @#IMG-DLM& (b)Operating structu

Question 13

The levels of fixed-cost assets and funds that management selects affect the variability of returns.

Accepted Answer

A) True 
 B)False

Question 14

The breakeven point in dollars can be computed by dividing the contribution margin into the variable operating costs.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

A firm's operating breakeven point is the level of sales necessary to cover all fixed operating costs.

Accepted Answer

A) True 
 B)False

Question 17

The dollar breakeven sales level can be solved for by dividing fixed costs by the dollar contribution margin.

Accepted Answer

A) True 
 B)False

Question 18

A firm has fixed operating costs of $525,000.The sales price per unit is $35 and its variable costs per unit is $22.50.The firm's operating breakeven point in units is ________.

Accepted Answer

A) $23,330 
B) $32,000 
C) $42,000 
D) $52,000 
A) $23,330 
B) $32,000 
C) $42,000 
D) $52,000

Question 19

Which of the following is a difference between debt and equity capital?

Accepted Answer

A) Debt capital does not require periodic payments,whereas equity capital requires period payments. 
B) Debt capital requires a fixed rate of return,whereas equity capital requires returns in proportion to profits. 
C) Debt capital does not provides a tax shield,whereas equity capital provides a tax shield. 
D) Debt capital affects operating leverage,whereas equity capital affects financial leverage. 
A) Debt capital does not require periodic payments,whereas equity capital requires period payments. 
B) Debt capital requires a fixed rate of return,whereas equity capital requires returns in proportion to profits. 
C) Debt capital does not provides a tax shield,whereas equity capital provides a tax shield. 
D) Debt capital affects operating leverage,whereas equity capital affects financial leverage.

Question 20

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

Accepted Answer

A) Systematic risk 
B) Business risk 
C) Financial risk 
D) Diversifiable risk 
A) Systematic risk 
B) Business risk 
C) Financial risk 
D) Diversifiable risk

Revenue stability affects ________.

Financial risk refers to fluctuations in a firm's cash flows that occur because the firm uses financing sources like debt and preferred stock.

________ is the potential use of fixed financial charges to magnify the effects of changes in earnings before interest and taxes on a firm's earnings per share.

A firm's capital structure is the mix of the current liabilities,long-term debt,and equity maintained by the firm.

Debt capital is less risky than equity capital because a firm is legally obligated to pay interest to bondholders but they are not legally obligated to pay dividends to preferred or common stockholders.

The reason why maximizing share value and maximizing EPS do not give the same optimal capital structure is because ________.

Generally,increases in leverage result in increased return and risk.

________ is the potential use of fixed costs to magnify the effect of changes in sales on the firm's earnings per share.

Frankline Coin,Inc.is considering two capital structures.The key information follows.Assume a 40 percent tax rate and expected EBIT of $50,000. (a)Calculate two EBIT-EPS coordinates for each of the structures. (b)Indicate over what EBIT range,if any,each structure is preferred.

If a firm's variable costs per unit increase,the firm's ________.

Table 13.1 -What is the degree of financial leverage at a base level EBIT of $120,000 for both financing plans? The firm has a 21 percent tax rate.(See Table 13.1)

The levels of fixed-cost assets and funds that management selects affect the variability of returns.

The breakeven point in dollars can be computed by dividing the contribution margin into the variable operating costs.

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

A firm's operating breakeven point is the level of sales necessary to cover all fixed operating costs.

The dollar breakeven sales level can be solved for by dividing fixed costs by the dollar contribution margin.

A firm has fixed operating costs of $525,000.The sales price per unit is $35 and its variable costs per unit is $22.50.The firm's operating breakeven point in units is ________.

Which of the following is a difference between debt and equity capital?

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

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

Revenue stability affects ________.

Financial risk refers to fluctuations in a firm's cash flows that occur because the firm uses financing sources like debt and preferred stock.

________ is the potential use of fixed financial charges to magnify the effects of changes in earnings before interest and taxes on a firm's earnings per share.

A firm's capital structure is the mix of the current liabilities,long-term debt,and equity maintained by the firm.

Debt capital is less risky than equity capital because a firm is legally obligated to pay interest to bondholders but they are not legally obligated to pay dividends to preferred or common stockholders.

The reason why maximizing share value and maximizing EPS do not give the same optimal capital structure is because ________.

Generally,increases in leverage result in increased return and risk.

________ is the potential use of fixed costs to magnify the effect of changes in sales on the firm's earnings per share.

Frankline Coin,Inc.is considering two capital structures.The key information follows.Assume a 40 percent tax rate and expected EBIT of $50,000. (a)Calculate two EBIT-EPS coordinates for each of the structures. (b)Indicate over what EBIT range,if any,each structure is preferred.

If a firm's variable costs per unit increase,the firm's ________.

Table 13.1 -What is the degree of financial leverage at a base level EBIT of $120,000 for both financing plans? The firm has a 21 percent tax rate.(See Table 13.1)

The levels of fixed-cost assets and funds that management selects affect the variability of returns.

The breakeven point in dollars can be computed by dividing the contribution margin into the variable operating costs.

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

A firm's operating breakeven point is the level of sales necessary to cover all fixed operating costs.

The dollar breakeven sales level can be solved for by dividing fixed costs by the dollar contribution margin.

A firm has fixed operating costs of $525,000.The sales price per unit is $35 and its variable costs per unit is $22.50.The firm's operating breakeven point in units is ________.

Which of the following is a difference between debt and equity capital?

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

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