Question 1

In theory, the firm should maintain financial leverage consistent with a capital structure that

Accepted Answer

A)   maximizes the earnings per share.
B)   meets the industry standard.
C)   maximizes dividends.
D)   maximizes the owner's wealth.E) B) and D)
F) A) and B)

Question 2

A firm has fixed operating costs of $10,000, the sale price per unit of its product is $25, and its variable cost per unit is $15. The firm's operating break-even point in units is___________ and its breakeven point in dollars is___________ .

Accepted Answer

A)   400; $10,000
B)   250; $ 6,250
C)   667; $16,675
D)   1,000; $25,000E) C) and D)
F) None of the above

Question 3

The financial break-even point represents the level of earnings before interest and taxes necessary for the firm to cover its fixed operating and financial changes-that is, the point at which earnings per share (EPS) is equal to zero.

Accepted Answer

A) True 
 B)False

Question 4

_________leverage is concerned with the relationship between sales revenues and earnings beforeinterest and taxes.

Accepted Answer

A)   Financial
B)   Total
C)   Operating
D)   VariableE) A) and C)
F) All of the above

Question 5

The_________approach to capital structure proposes that an optimal capital structure be selected which_________.

Accepted Answer

A)   M and M; maximizes the weighted average cost of capital
B)   residual theory; minimizes dividends
C)   EBIT-EPS; maximizes the EPS
D)   traditional; minimizes the cost of debtE) A) and B)
F) None of the above

Question 6

Firms having stable and predictable revenues can more safely undertake highly leveraged capital structures than can firms with volatile patterns of sales revenue.

Accepted Answer

A) True 
 B)False

Question 7

A firm has interest expense of $145,000, preferred dividends of $25,000, and a tax rate of 40 percent.The firm's financial break-even point is _________.

Accepted Answer

A)   $186,667
B)   $ 25,000
C)   $170,000
D)   $145,000E) B) and C)
F) A) and D)

Question 8

Generally,__________in leverage result in,__________return and,__________risk.

Accepted Answer

A)   increases, increased, increased
B)   increases, decreased, increased
C)   decreases, increased, decreased
D)   increases, decreased, decreasedE) B) and C)
F) A) and B)

Question 9

The more fixed cost financing a firm has in its capital structure, the greater its financial leverage and risk.

Accepted Answer

A) True 
 B)False

Question 10

A corporation has $5,000,000 in 8 percent preferred stock outstanding and a 40 percent tax rate. The aftertax cost of the preferred stock is___________.

Accepted Answer

A)   $160,000
B)   $666,667
C)   $240,000
D)   $400,000E) None of the above
F) A) and B)

Question 11

M and M Proposition I states that

Accepted Answer

A)   the value of a firm's assets and operations does not change with changes in the firm's capital structure.
B)   the value of the firm is maximized when the WACC after-tax is minimized.
C)   the cost of equity is a positive linear function of its capital structure.
D)   the only risk relevant in measuring the cost of equity is business risk.E) A) and C)
F) B) and D)

Question 12

A shift toward more fixed costs increases business risk, which in turn causes earnings beforeinterest and taxes to increase by less for a given increase in sales.

Accepted Answer

A) True 
 B)False

Question 13

The inexpensive nature of long-term debt in a firm's capital structure is due to the fact that

Accepted Answer

A)   the equity holders are the true owners of the firm.
B)   equity holders have a higher position in the priority of claims.
C)   interest payments are tax-deductible.
D)   equity capital has a fixed return.E) C) and D)
F) A) and B)

Question 14

__________is the potential use of fixed costs, both operating and financial, to magnify the effect of changes in sales on the firm's earnings per share.

Accepted Answer

A)   Operating leverage
B)   Debt service
C)   Total leverage
D)   Financial leverageE) B) and C)
F) All of the above

Question 15

_________is the potential use of fixed operating costs to magnify the effects of changes in sales on earnings before interest and taxes.

Accepted Answer

A)   Financial leverage
B)   Total leverage
C)   Operating leverage
D)   Ratio analysisE) A) and D)
F) A) and B)

Question 16

Breakeven analysis is used by the firm to determine the level of operations necessary to cover all fixed operating costs and to evaluate the profitability associated with various levels of sales.

Accepted Answer

A) True 
 B)False

Question 17

The contribution margin is defined as the percent of each sales dollar that remains after satisfying fixed operating costs.

Accepted Answer

A) True 
 B)False

Question 18

Operating leverage results from the existence of operating costs in the firm's income stream.

Accepted Answer

A) True 
 B)False

Question 19

A firm has fixed operating costs of $25,000, a per unit sales price of $5, and a variable cost per unit of $3. What is its operating break-even point if it desires net operating income of $10,000, not $0 (zero) ?

Accepted Answer

A)   15,000 units
B)   17,500 units
C)   12,500 units
D)   25,000 unitsE) B) and D)
F) All of the above

Question 20

For sales levels below the operating break-even point, sales revenue exceeds total operating costs, and earnings before interest and taxes is greater than zero.

Accepted Answer

A) True 
 B)False

Exam 10: Leverage and Capital Structure

A firm has fixed operating costs of $10,000, the sale price per unit of its product is $25, and its variable cost per unit is $15. The firm's operating break-even point in units is___________ and its breakeven point in dollars is___________ .

Correct AnswerverifiedShow Answer

A firm has interest expense of $145,000, preferred dividends of $25,000, and a tax rate of 40 percent.The firm's financial break-even point is _________.

Correct AnswerverifiedShow Answer

__________is the potential use of fixed costs, both operating and financial, to magnify the effect of changes in sales on the firm's earnings per share.

Correct AnswerverifiedShow Answer

A shift toward more fixed costs increases business risk, which in turn causes earnings beforeinterest and taxes to increase by less for a given increase in sales.

Correct AnswerverifiedShow Answer

The_________approach to capital structure proposes that an optimal capital structure be selected which_________.

Correct AnswerverifiedShow Answer

M and M Proposition I states that

Correct AnswerverifiedShow Answer

The financial break-even point represents the level of earnings before interest and taxes necessary for the firm to cover its fixed operating and financial changes-that is, the point at which earnings per share (EPS) is equal to zero.

Correct AnswerverifiedShow Answer

_________leverage is concerned with the relationship between sales revenues and earnings beforeinterest and taxes.

Correct AnswerverifiedShow Answer

Breakeven analysis is used by the firm to determine the level of operations necessary to cover all fixed operating costs and to evaluate the profitability associated with various levels of sales.

Correct AnswerverifiedShow Answer

For sales levels below the operating break-even point, sales revenue exceeds total operating costs, and earnings before interest and taxes is greater than zero.

Correct AnswerverifiedShow Answer

A corporation has $5,000,000 in 8 percent preferred stock outstanding and a 40 percent tax rate. The aftertax cost of the preferred stock is___________.

Correct AnswerverifiedShow Answer

In theory, the firm should maintain financial leverage consistent with a capital structure that

Correct AnswerverifiedShow Answer

Operating leverage results from the existence of operating costs in the firm's income stream.

Correct AnswerverifiedShow Answer

A firm has fixed operating costs of $25,000, a per unit sales price of $5, and a variable cost per unit of $3. What is its operating break-even point if it desires net operating income of $10,000, not $0 (zero) ?

Correct AnswerverifiedShow Answer

Generally,__________in leverage result in,__________return and,__________risk.

Correct AnswerverifiedShow Answer

The contribution margin is defined as the percent of each sales dollar that remains after satisfying fixed operating costs.

Correct AnswerverifiedShow Answer

_________is the potential use of fixed operating costs to magnify the effects of changes in sales on earnings before interest and taxes.

Correct AnswerverifiedShow Answer

The more fixed cost financing a firm has in its capital structure, the greater its financial leverage and risk.

Correct AnswerverifiedShow Answer

The inexpensive nature of long-term debt in a firm's capital structure is due to the fact that

Correct AnswerverifiedShow Answer

Firms having stable and predictable revenues can more safely undertake highly leveraged capital structures than can firms with volatile patterns of sales revenue.

Correct AnswerverifiedShow Answer

A firm has fixed operating costs of $10,000, the sale price per unit of its product is $25, and its variable cost per unit is $15. The firm's operating break-even point in units is_ and its breakeven point in dollars is_ .

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The_approach to capital structure proposes that an optimal capital structure be selected which_.

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Generally,in leverage result in,return and,__risk.

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