Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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.E) A) and C)
F) A) and B)

Question 3

Depreciation is considered a fixed cost.

Accepted Answer

A) True 
 B)False

Question 4

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 5

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.E) C) and D)
F) A) and C)

Question 6

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 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

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

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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%.E) None of the above
F) A) and B)

Question 11

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 12

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 13

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

Accepted Answer

A) True 
 B)False

Question 14

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.E) C) and D)
F) B) and D)

Question 15

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 16

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.E) B) and C)
F) All of the above

Question 17

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.E) C) and D)
F) A) and D)

Question 18

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

Accepted Answer

The sources of volatility in the firm's ...

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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.E) All of the above
F) B) and C)

Exam 12: Determining the Financing Mix

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

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements about operating leverage is true?

Correct AnswerverifiedShow Answer

Depreciation is considered a fixed cost.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedThe sources of volatility in the firm's ...View AnswerShow Answer

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.

Correct AnswerverifiedShow Answer

Operating leverage has to do with

Correct AnswerverifiedShow Answer

Operating leverage refers to

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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The sources of volatility in the firm's ...
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