Question 1

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 2

Sweet Tooth Bakery bakes and sells pies.Sweet Tooth has annual fixed costs of $880,000 and a variable cost per pie of $7.50.Each pie sells for $15.50 each.The firm expects to sell 500,000 pies annually.What is the break-even point in sales dollars?

Accepted Answer

A)  $3,100,000 
B)  $2,875,000 
C)  $1,705,000 
D)  $1,625,000

Question 3

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 4

Business risk refers to

Accepted Answer

A)  the risk associated with financing a firm with debt. 
B)  the variability of a firm's expected earnings before interest and taxes. 
C)  the uncertainty associated with a firm's CAPM. 
D)  the variability of a firm's stock price.

Question 5

The break-even model enables the manager of the firm to

Accepted Answer

A)  calculate the minimum price of common stock for certain situations. 
B)  set appropriate equilibrium thresholds. 
C)  determine the quantity of output that must be sold to cover all operating costs. 
D)  determine the optimal amount of debt financing to use.

Question 6

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 7

When using an EPS-EBIT chart to evaluate a pure debt financing and pure equity financing plan

Accepted Answer

A)  the debt financing plan line will graph with a steeper slope than the equity financing plan line. 
B)  the debt financing plan line will have a lower level of EBIT at EPS = 0. 
C)  the line of the two financing plans will intersect on the EBIT axis. 
D)  the slope of the equity financing plan line will be steeper than the debt financing plan line below the intersection of the two lines.

Question 8

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 9

The Modigliani and Miller hypothesis suggests that capital structure doesn't matter.All of the following conditions need to be met for this hypothesis to be true except:

Accepted Answer

A)  corporate income is not subject to taxation. 
B)  capital structure consists only of stocks and bonds. 
C)  securities are traded in perfect or efficient markets. 
D)  all corporate net income is paid out as dividends.

Question 10

Financial structure is another term for capital structure.

Accepted Answer

A) True 
 B)False

Question 11

The following information pertains to the Classic Burger Restaurant chain:
  a.If sales increase by 10%,what will be the new level of EPS if the firm has 100,000 shares outstanding?
b.What is the percentage increase in EPS?
 Explain the difference between the percentage increase in sales and the percentage increase in EPS.

Accepted Answer

The answer of The following information pertains to the Classic...

Question 12

One component of a firm's financial structure which is not a component of its capital structure is:

Accepted Answer

A)  common stock. 
B)  accounts payable. 
C)  long-term debt. 
D)  preferred stock.

Question 13

The more fixed-charge securities (such as bonds and preferred stock)the firm employs in its financial structure,the greater its financial leverage.

Accepted Answer

A) True 
 B)False

Question 14

An increase in financial leverage will increase the absolute value of EPS,everything else equal.

Accepted Answer

A) True 
 B)False

Question 15

As production levels increase,

Accepted Answer

A)  variable costs per unit decrease. 
B)  fixed costs per unit increase. 
C)  fixed costs per unit stay the same and variable costs per unit increase. 
D)  fixed costs per unit decrease and variable costs per unit stay the same.

Question 16

The implicit cost of debt takes into consideration the change in the cost of common equity brought on by using additional debt.

Accepted Answer

A) True 
 B)False

Question 17

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 18

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 19

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 20

According to the moderate view of capital costs and financial leverage,as the use of debt financing increases:

Accepted Answer

A)  the cost of capital continuously decreases. 
B)  the cost of capital remains constant. 
C)  the cost of capital continuously increases. 
D)  there is an optimal level of debt financing.

Exam 12: Determining the Financing Mix

Financial leverage is distinct from operating leverage since it accounts for

Sweet Tooth Bakery bakes and sells pies.Sweet Tooth has annual fixed costs of $880,000 and a variable cost per pie of $7.50.Each pie sells for $15.50 each.The firm expects to sell 500,000 pies annually.What is the break-even point in sales dollars?

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

Business risk refers to

The break-even model enables the manager of the firm to

The break-even point is equal to

When using an EPS-EBIT chart to evaluate a pure debt financing and pure equity financing plan

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?

The Modigliani and Miller hypothesis suggests that capital structure doesn't matter.All of the following conditions need to be met for this hypothesis to be true except:

Financial structure is another term for capital structure.

One component of a firm's financial structure which is not a component of its capital structure is:

The more fixed-charge securities (such as bonds and preferred stock)the firm employs in its financial structure,the greater its financial leverage.

An increase in financial leverage will increase the absolute value of EPS,everything else equal.

As production levels increase,

The implicit cost of debt takes into consideration the change in the cost of common equity brought on by using additional debt.

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

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.

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.

According to the moderate view of capital costs and financial leverage,as the use of debt financing increases: