Question 1

Other things the same,the use of debt financing reduces the firm's total tax bill resulting in a higher total market value.

Accepted Answer

A) True 
 B)False

Question 2

The moderate view of capital structure theory allows for the tax-deductibility of interest expense.

Accepted Answer

A) True 
 B)False

Question 3

Operating leverage is the responsiveness of a firm's EBIT to changes in sales revenues.

Accepted Answer

A) True 
 B)False

Question 4

The break-even point is equal to

Accepted Answer

A) fixed costs divided by (sales price per unit - variable cost per unit). 
B) fixed costs divided by unit variable costs. 
C) fixed costs divided by selling price per unit. 
D) (sales price per unit - variable cost per unit)times the fixed costs.

Question 5

The EBIT-EPS indifference point is the level of production at which the company's EBIT equals its EPS.

Accepted Answer

A) True 
 B)False

Question 6

Sales of consumer durable goods,such as appliances,are more sensitive to swings in the business cycle,and therefore companies in these industries face a higher level of operating risk.

Accepted Answer

A) True 
 B)False

Question 7

Amalgamated Mining,Inc.has very high operating leverage due to the capital intensive nature of the steel business.The firm's CEO is concerned about the variability in the firm's EPS if sales should drop,and decides to take action.Which of the following will reduce the variability in the firm's EPS for a given change in sales?

Accepted Answer

A) The CEO may increase the firm's financial leverage and hence reduce the variability by using non-shareholder money to support the business. 
B) The CEO may decrease the firm's financial leverage,thus lowering the firm's total leverage. 
C) The CEO may increase the firm's total leverage by raising money from the sale of common stock. 
D) The CEO may issue more corporate bonds and use the proceeds to pay off short-term liabilities.

Question 8

Fixed costs per unit vary inversely with production output.

Accepted Answer

A) True 
 B)False

Question 9

The Western Boot Company will produce 94,000 pairs of boots next year.Variable costs are 35 percent of sales,while fixed costs total $223,000.At what price must each pair of boots be sold for Western to obtain an EBIT of $1,391,500?

Accepted Answer

The answer of The Western Boot Company will produce 94,000...

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Depreciation is considered a fixed cost.

Accepted Answer

A) True 
 B)False

Question 12

The break-even quantity of output is that quantity of output,in units,that results in an EBIT equal to zero.

Accepted Answer

A) True 
 B)False

Question 13

The independence hypothesis allows for bankruptcy and agency costs.

Accepted Answer

A) True 
 B)False

Question 14

Dakota Oil,Inc.reported that its sales and EBIT increased by 10%,but its EPS increased by 30%.The much larger change in earnings per share could be the result of

Accepted Answer

A) high operating leverage. 
B) high financial leverage. 
C) a high percentage of credit sale collections from prior years. 
D) high fixed costs of production.

Question 15

Based on the data contained in Table A,what is the break-even point in units produced and sold? TABLE A

Accepted Answer

A) 130,000 
B) 140,000 
C) 150,000 
D) 180,000

Question 16

ACME,Inc.reported the following income statement for 2009:  If ACME's sales next year increase by 20%,ACME's EBIT will increase

Accepted Answer

A) 20%,showing no operating leverage. 
B) 20%,showing no financial leverage. 
C) over 35%,due to operating leverage. 
D) over 35%,due to operating leverage and financial leverage.

Question 17

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 18

Financial leverage is distinct from operating leverage since it accounts for

Accepted Answer

A) use of debt and preferred stock. 
B) variability in fixed operating costs. 
C) variability in sales. 
D) changes in EBIT.

Question 19

Which of the following is a fixed cost?

Accepted Answer

A) insurance 
B) direct material 
C) direct labor 
D) freight costs on products

Question 20

ABC Corp.has estimated the following income statement for its next fiscal year.  
a.What is the break-even point in sales dollars for the firm? 
b.If the average unit cost is $20,what is the break even point in units?

Accepted Answer

The answer of ABC Corp.has estimated the following income statement...

Exam 12: Determining the Financing Mix

Other things the same,the use of debt financing reduces the firm's total tax bill resulting in a higher total market value.

The moderate view of capital structure theory allows for the tax-deductibility of interest expense.

Operating leverage is the responsiveness of a firm's EBIT to changes in sales revenues.

The break-even point is equal to

The EBIT-EPS indifference point is the level of production at which the company's EBIT equals its EPS.

Sales of consumer durable goods,such as appliances,are more sensitive to swings in the business cycle,and therefore companies in these industries face a higher level of operating risk.

Fixed costs per unit vary inversely with production output.

The Western Boot Company will produce 94,000 pairs of boots next year.Variable costs are 35 percent of sales,while fixed costs total $223,000.At what price must each pair of boots be sold for Western to obtain an EBIT of $1,391,500?

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

Depreciation is considered a fixed cost.

The break-even quantity of output is that quantity of output,in units,that results in an EBIT equal to zero.

The independence hypothesis allows for bankruptcy and agency costs.

Dakota Oil,Inc.reported that its sales and EBIT increased by 10%,but its EPS increased by 30%.The much larger change in earnings per share could be the result of

Based on the data contained in Table A,what is the break-even point in units produced and sold? TABLE A

ACME,Inc.reported the following income statement for 2009: If ACME's sales next year increase by 20%,ACME's EBIT will increase

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

Financial leverage is distinct from operating leverage since it accounts for

Which of the following is a fixed cost?

ABC Corp.has estimated the following income statement for its next fiscal year. a.What is the break-even point in sales dollars for the firm? b.If the average unit cost is $20,what is the break even point in units?