Question 1

A CEO concerned about variability of earnings per share may try to offset high operating leverage with a capital structure that is mostly debt in order to take advantage of the interest tax shield.

Accepted Answer

A) True 
 B)False

Question 2

Operating leverage has to do with

Accepted Answer

A)  borrowing money to finance a firm's growth. 
B)  using preferred stock to increase sales volume. 
C)  the incurrence of fixed operating costs in the firm's income stream. 
D)  financing with fixed cost sources of capital.

Question 3

All of the following will make the break-even point increase,other things equal,EXCEPT

Accepted Answer

A)  fixed costs increase. 
B)  the sales price per unit is decreased due to competition. 
C)  variable costs increase due to higher direct labor cost. 
D)  the number of units sold for the year decreased.

Question 4

The tax shield on interest is calculated by multiplying the interest rate paid on debt by the principal amount of the debt and the firm's marginal tax rate.

Accepted Answer

A) True 
 B)False

Question 5

A decrease in the level of production results in decreased fixed cost per unit.

Accepted Answer

A) True 
 B)False

Question 6

What are the three determinants of the volatility of a firm's earnings?

Accepted Answer

The answer of What are the three determinants of the...

Question 7

If a company sells bonds and uses the proceeds to buy back common stock,the company's financial leverage with increase.

Accepted Answer

A) True 
 B)False

Question 8

The market value of a leveraged firm is equal to the market value of an unleveraged firm

Accepted Answer

A)  plus the present value of tax shields minus the present value of financial distress costs plus the present value of agency costs. 
B)  plus the present value of tax shields plus the present value of financial distress costs plus the present value of agency costs. 
C)  minus the present value of tax shields minus the present value of financial distress costs minus the present value of agency costs. 
D)  plus the present value of tax shields minus the present value of financial distress costs minus the present value of agency costs.

Question 9

Which of the following statements about operating leverage is true?

Accepted Answer

A)  Operating leverage reduces a firm's risk. 
B)  Operating leverage is the responsiveness of the firm's EBIT to fluctuations in sales. 
C)  Operating leverage involves the usage of fixed cost financial securities in the operation of a business. 
D)  Operating leverage is the responsiveness of the firm's EPS to fluctuations in sales.

Question 10

Because fixed costs do not vary with a firm's revenues,firms with high levels of fixed cost enjoy lower levels of operating risk because their costs are more certain,making budgeting easier.

Accepted Answer

A) True 
 B)False

Question 11

Over the relevant range of output,fixed costs remain unchanged.

Accepted Answer

A) True 
 B)False

Question 12

Above the EBIT-EPS indifference point,a more heavily levered financial plan will produce greater EPS.

Accepted Answer

A) True 
 B)False

Question 13

If a firm's production process requires high operating leverage (use of fixed costs),then the firm should finance its assets with debt,so that the cost of capital will be reduced and financing costs will remain fixed.

Accepted Answer

A) True 
 B)False

Question 14

If a firm has no operating leverage and no financial leverage,then a 10% increase in sales will have what effect on EPS?

Accepted Answer

A)  EPS will remain the same. 
B)  EPS will increase by 10%. 
C)  EPS will decrease by 10%. 
D)  EPS will increase by less than 10%.

Question 15

The independence hypothesis suggests that the total market value of the firm's outstanding securities is unaffected by its capital structure.

Accepted Answer

A) True 
 B)False

Question 16

All of the following are likely to result in the use of less debt in a company's capital structure EXCEPT

Accepted Answer

A)  desire to maintain financial flexibility. 
B)  desire to maintain a high credit rating. 
C)  insufficient internal funds. 
D)  a decrease in a company's marginal tax rate.

Question 17

The optimal capital structure occurs when operating leverage equals financial leverage.

Accepted Answer

A) True 
 B)False

Question 18

Depreciation is considered a fixed cost.

Accepted Answer

A) True 
 B)False

Question 19

Operating leverage refers to

Accepted Answer

A)  financing a portion of the firm's assets with securities bearing a fixed rate of return. 
B)  the additional chance of insolvency borne by the common shareholder. 
C)  the incurrence of fixed operating costs in the firm's income stream. 
D)  a high degree of variable costs of production.

Question 20

Break-even analysis assumes that a multiproduct firm maintains a constant production and sales mix.

Accepted Answer

A) True 
 B)False

Exam 12: Determining the Financing Mix

A CEO concerned about variability of earnings per share may try to offset high operating leverage with a capital structure that is mostly debt in order to take advantage of the interest tax shield.

Operating leverage has to do with

All of the following will make the break-even point increase,other things equal,EXCEPT

The tax shield on interest is calculated by multiplying the interest rate paid on debt by the principal amount of the debt and the firm's marginal tax rate.

A decrease in the level of production results in decreased fixed cost per unit.

What are the three determinants of the volatility of a firm's earnings?

If a company sells bonds and uses the proceeds to buy back common stock,the company's financial leverage with increase.

The market value of a leveraged firm is equal to the market value of an unleveraged firm

Which of the following statements about operating leverage is true?

Because fixed costs do not vary with a firm's revenues,firms with high levels of fixed cost enjoy lower levels of operating risk because their costs are more certain,making budgeting easier.

Over the relevant range of output,fixed costs remain unchanged.

Above the EBIT-EPS indifference point,a more heavily levered financial plan will produce greater EPS.

If a firm's production process requires high operating leverage (use of fixed costs),then the firm should finance its assets with debt,so that the cost of capital will be reduced and financing costs will remain fixed.

If a firm has no operating leverage and no financial leverage,then a 10% increase in sales will have what effect on EPS?

The independence hypothesis suggests that the total market value of the firm's outstanding securities is unaffected by its capital structure.

All of the following are likely to result in the use of less debt in a company's capital structure EXCEPT

The optimal capital structure occurs when operating leverage equals financial leverage.

Depreciation is considered a fixed cost.

Operating leverage refers to

Break-even analysis assumes that a multiproduct firm maintains a constant production and sales mix.