Exam 17: Capital Structure Management in Practice

The degree of combined leverage is equal to the ____ multiplied by the ____.

A firm is said to be ____ if it is unable to meet its current obligations.

Suppose ITC's degree of combined leverage (DCL) is 3.00 at a sales volume of $9 million. Determine ITC's percentage change in earnings per share (EPS) if forecasted sales increase by 20% to $10,800,000.

Explain the difference between short-run costs and long-run costs.

Given the following financial data for Cosmos, compute the firm's degree of combined leverage. Sales \ 780,000 \ 874,000 Fixed costs 195,000 218,500 Variable costs 460,200 EBIT 124,800 131,100 Interest 46,800 52,400 EPS \ 0.42 \ 0.51

If a firm sees its EPS increase 27% on a 12% increase in sales. During the same period the firm saw its EBIT increase only 8%. What is the firm's DOL?

A firm that employs relatively large amounts of labor- saving equipment in its operations will have a relatively ____ degree of operating leverage.

What type of security is used to purchase a target company in a leveraged buy-out?

Twin City Printing is considering two financial alternatives for financing a major expansion program. Under either alternative EBIT is expected to be $15.6 million. Currently the firm's capital structure consists of 4 million shares of common stock and $35 million in 11% long-term bonds. Under the debt financing alternative $10 million in 12% long-term bonds will be sold, and under the equity financing alternative the firm would sell 500,000 shares of common stock. The P/E under the debt alternative would be 15, and the P/E under the equity alternative would be 16. The firm's marginal tax rate is 40%. Which alternative would produce the higher stock price?

What would be the degree of financial leverage for Under A Cloud Skydiving School if the company will have earnings before interest and taxes of $750,000, which would be a 15% increase? The firm had EPS of $1.25 but, with the increased earnings, anticipates paying $1.37.

Why does a firm use operating and financial leverage? In what ways does it help the firm and in what ways does it hurt the firm?

The Albany Corporation has a present capital structure consisting of common stock ($200 million, 10 million shares) and debt ($150 million, 8%). The company is planning a major expansion and is undecided between two financing plans. Plan A: Equity financing. Under this plan, an additional 2.5 million shares of common stock will be sold at $15 each. Plan B: Debt financing. Under this plan, $37.5 million of 10% long-term debt will be sold. ​ What happens to the EBIT indifference point if the interest rate on the new debt decreases and the common stock price remains constant?

Dagger Company has a current capital structure consisting of $60 million in long-term debt with an interest rate of 9% and $60 million in common equity (12 million shares). The firm is considering an expansion plan costing $23 million. The expansion plan can be financed with additional long-term debt at a 12% interest rate or the sale of new common stock at $8 per share. The firm's marginal tax rate is 40%. Determine the indifference level of EBIT for the two financing plans.

Fanny Nanny Weight Monitors Inc. is considering two financial alternatives for financing a major expansion program. Under either alternative, EBIT is expected to be $12.5million. Currently the firm's capital structure consists of 2 million shares of common stock and $15 million in 6% long-term bonds. Under the debt financing alternative $8 million in 4% long-term bonds will be sold and under the equity financing alternative the firm would sell 150,000 shares of common stock. The P/E under the debt alternative would be 21 and the P/E under the equity alternative would be 22. The firm's marginal tax rate is 40%. Which alternative would produce the higher stock price?

Two companies, Jefferson and Jackson, are virtually identical in all aspects of their operations except that the two companies differ in their capital structures, as shown below. Jefferson Jackson Jefferson Jackson Debt (10\%) \ 200 million \ 100 million Common equity \ 300 million \ 400 million No. shares outstanding 15 million 20 million ? Both companies have $500 million in total assets and both have a 40% marginal tax rate. What is the EPS for Jackson at an EBIT level of $50 million?

Midwest Can Company is considering opening a new plant in St. Louis that is expected to produce an average EBIT of $3 million per year. To finance this new plant, Midwest is considering two financing plans. The first plan is to sell 600,000 shares of common stock at $15 each. The second plan is to sell 200,000 shares of common stock at $15 each and $6 million of 13% long-term debt. Assuming Midwest has a marginal tax rate of 40%, what is the EBIT-EPS indifference point for this plant?

A negative DOL indicates the percentage ____ in operating losses that occurs as the result of a 1% increase in output.

Dippity Doodle Noodle Makers has a capital structure that consists of 2.0 million shares outstanding and $2.0 million of debt at 8% interest. The company is planning a major plant expansion and must decide between the following two financing plans. Option 1 is to increase debt by $1.0 million at 9% interest and sell 10,000 new shares of stock at $50 per share. Option 2 is to sell 30,000 new shares of stock at $50 per share. What would be the indifference point and, considering that EBIT is expected to be $10,000,000, which option would be best?

Raw material and direct labor costs are examples of ____.

What is the degree of operating leverage for Flippin' Out Company, a maker of scuba flippers, if the firm sells its finished product for $50 per unit with variable costs per unit of $15? The company has fixed operating costs of $2,000,000 and sells 200,000 units. (The answer is rounded.)