Question 1

Some firms prefer to use debt or preferred stock for financing to retain control.Explain the rationale behind this method.

Accepted Answer

Some firms choose debt or preferred stoc

Question 2

The degree of combined leverage is defined as the percentage change in earnings per share resulting from a given percentage change in

Accepted Answer

A) operating costs 
B) interest charges 
C) common stock dividends 
D) sales (or output) 
A) operating costs 
B) interest charges 
C) common stock dividends 
D) sales (or output)

Question 3

Some companies use debt or preferred stock financing instead of common stock financing.The purpose is:

Accepted Answer

A) to retain control 
B) to facilitate record-keeping 
C) to maintain privacy 
D) to prevent audit problems 
A) to retain control 
B) to facilitate record-keeping 
C) to maintain privacy 
D) to prevent audit problems

Question 4

Dippity Doodle Noodle Makers has a capital structure that consists of2.0 million shares outstanding and $2.0 million of debt at 8% interest.The company is planning a major plant expansion 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

Accepted Answer

A) Indifference of $10,750,000.Use stock option. 
B) Indifference of $1,600,000.Use stock option. 
C) Indifference of $16,270,000.Use the debt option. 
D) Indifference of $9,250,000.Use the debt option. 
A) Indifference of $10,750,000.Use stock option. 
B) Indifference of $1,600,000.Use stock option. 
C) Indifference of $16,270,000.Use the debt option. 
D) Indifference of $9,250,000.Use the debt option.

Question 5

Crown Data (CD) has a current capital structure that consists of$120 million in common equity (15 million shares) and $80 million in long-term debt with an average interest rate of 11 percent.CD is considering an expansion project that will cost $22 million.The project will be financed either by issuing long-term debt at a cost of 12.5 percent, or the sale of new common stock at $35 per share.The firm's marginal tax rate is 40%.What is the EBIT indifference point between the two financing options?

Accepted Answer

A) $71.5 million 
B) $77.2 million 
C) $68.3 million 
D) $1.0 million 
A) $71.5 million 
B) $77.2 million 
C) $68.3 million 
D) $1.0 million

Question 6

Given the following financial data for Boston Technology, compute the firm's degree of combined leverage.Assume a marginal tax rate of 40%.

Accepted Answer

A) 0.29 
B) -0.38 
C) -0.15 
D) 0.38 
A) 0.29 
B) -0.38 
C) -0.15 
D) 0.38

Question 7

In evaluating a firm's degree of financial leverage, financial risk is with an increase in DFL.

Accepted Answer

A) increased 
B) decreased 
C) not impacted 
D) reflective of excess inventory 
A) increased 
B) decreased 
C) not impacted 
D) reflective of excess inventory

Question 8

Last year Alpine Growers experienced a 34% increase in earnings per share on 11% increase in sales.If management knows that Alpine's DOL is 1.5, what is its DFL?

Accepted Answer

A)  3.09 
B)  2.06 
C)  3.55 
D)  1.67 
A)  3.09 
B)  2.06 
C)  3.55 
D)  1.67

Question 9

A firm is considering the purchase of assets that will increase its fixed operating costs.The firm should decrease the proportion of it employs in its capital structure if it wants to maintain its existing degree of combined leverage.

Accepted Answer

A) debt 
B) warrants 
C) common stock 
D) common stock and warrants 
A) debt 
B) warrants 
C) common stock 
D) common stock and warrants

Question 10

Sitco has a total of $12 million in cash and marketable securities.Free cash flows during the coming year are expected to be $47 million with a standard deviation of$31 million.Assume that Sitco's free cash flows are approximately normally distributed.What is the probability that Sitco will run out of cash during the coming year?

Accepted Answer

A)  29.98% 
B)  34.83% 
C)  97.13% 
D)  2.87% 
A)  29.98% 
B)  34.83% 
C)  97.13% 
D)  2.87%

Question 11

Given the following financial data for Cosmos, compute the firm's degree of financial leverage.

Accepted Answer

A)  23.81 
B)  4.24 
C)  0.42 
D)  2.18 
A)  23.81 
B)  4.24 
C)  0.42 
D)  2.18

Question 12

A change in EBIT is magnified into a larger change in EPS.This means that financial leverage is using as its fulcrum.

Accepted Answer

A) short-term costs 
B) fixed costs 
C) variable costs 
D) retained earnings 
A) short-term costs 
B) fixed costs 
C) variable costs 
D) retained earnings

Question 13

The Lincoln Mint produces various types of one ounce silver commemorative medals for sale to collectors.The cost of producing and selling a given medal is as follows:
Fixed costs:
 
Projected selling price: $ 14.00
What is the degree of operating leverage at an output level of 15,000 units?

Accepted Answer

A) 0.0 
B) 1.0 
C) 3.0 
D) cannot be determined from the information provided 
A) 0.0 
B) 1.0 
C) 3.0 
D) cannot be determined from the information provided

Question 14

In what way does management's willingness to assume risk impact the firm?

Accepted Answer

Its willingness to assume risk often has

Question 15

Ipsy Dipsy Preschools, Inc.has a capital structure that consists of 60% common equity (2.0 million shares), 30% long-term debt ($10 million with 12% coupon), and 10% preferred stock ($50 par value with $4.75 dividend).The company is planning a major plant expansion and is undecided between the following two financing plans:
1) Equity financing: Sale of 400,000 shares of common at $10 each.
2) Debt financing: Sale of$4 million of 12.5 percent long-term bonds.
Calculate the EBIT-EPS indifference point.Assume the marginal tax rate is 40%.

Accepted Answer

A) $4.253 million 
B) $3.051 million 
C) $3.654 million 
D) $4.728 million 
A) $4.253 million 
B) $3.051 million 
C) $3.654 million 
D) $4.728 million

Question 16

In evaluating degree of operating leverage, it is best that the firm's DOL is:

Accepted Answer

A) higher than 1 
B) higher than 2 
C) lower than 1 
D) equal to 1 
A) higher than 1 
B) higher than 2 
C) lower than 1 
D) equal to 1

Question 17

River Rafts has determined that its expected EBIT for the coming year is $8.3 million.The EBIT is approximately normally distributed with a standard deviation of $5.1 million.If River Rafts has $1.9 million in annual interest payments, what is the probability that the firm will have negative earnings?

Accepted Answer

A) 4.65% 
B) 10.47% 
C) 5.16% 
D) 35.20% 
A) 4.65% 
B) 10.47% 
C) 5.16% 
D) 35.20%

Question 18

What would be the degree of financial leverage for Foggy Futures Weather Forecasters if the company has earnings before interest and taxes of$750,000, has a 4.5% loan on $1,000,000 and is in the 38% tax bracket? The firm does not have any preferred stock outstanding.

Accepted Answer

A) 1.22 
B) 1.78 
C) 1.06 
D) 97 
A) 1.22 
B) 1.78 
C) 1.06 
D) 97

Question 19

The Ames Company has an expected EBIT of $16 million with a standard deviation of $8 million.The indifference point between a debt financing alternative and a common stock financing alternative was computed to be $12 million.Determine the probability that the equity financing alternative will be superior to the debt financing alternative (i.e., have a higher EPS).(Problem requires normal distribution table.)

Accepted Answer

A) 50.0% 
B) 30.85% 
C) 69.15% 
D) cannot be computed 
A) 50.0% 
B) 30.85% 
C) 69.15% 
D) cannot be computed

Question 20

Rent, insurance, and the salaries of top management are examples of:

Accepted Answer

A) fixed costs 
B) capital costs 
C) variable costs 
D) fluctuating costs 
A) fixed costs 
B) capital costs 
C) variable costs 
D) fluctuating costs

Exam 14: Capital Structure Management in Practice

Some firms prefer to use debt or preferred stock for financing to retain control.Explain the rationale behind this method.

The degree of combined leverage is defined as the percentage change in earnings per share resulting from a given percentage change in

Some companies use debt or preferred stock financing instead of common stock financing.The purpose is:

Given the following financial data for Boston Technology, compute the firm's degree of combined leverage.Assume a marginal tax rate of 40%.

In evaluating a firm's degree of financial leverage, financial risk is with an increase in DFL.

Last year Alpine Growers experienced a 34% increase in earnings per share on 11% increase in sales.If management knows that Alpine's DOL is 1.5, what is its DFL?

A firm is considering the purchase of assets that will increase its fixed operating costs.The firm should decrease the proportion of it employs in its capital structure if it wants to maintain its existing degree of combined leverage.

Given the following financial data for Cosmos, compute the firm's degree of financial leverage.

A change in EBIT is magnified into a larger change in EPS.This means that financial leverage is using as its fulcrum.

The Lincoln Mint produces various types of one ounce silver commemorative medals for sale to collectors.The cost of producing and selling a given medal is as follows: Fixed costs: Projected selling price: $ 14.00 What is the degree of operating leverage at an output level of 15,000 units?

In what way does management's willingness to assume risk impact the firm?

In evaluating degree of operating leverage, it is best that the firm's DOL is:

What would be the degree of financial leverage for Foggy Futures Weather Forecasters if the company has earnings before interest and taxes of$750,000, has a 4.5% loan on $1,000,000 and is in the 38% tax bracket? The firm does not have any preferred stock outstanding.

Rent, insurance, and the salaries of top management are examples of:

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

A: The Time Value of Money

Fixed-Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Capital Budgeting: Decision Criteria and Real Option Considerations

A: Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital, Capital Structure, and Dividend Policy

Capital Structure Concepts

A: Capital Structure Management in Practice

Dividend Policy

Working Capital Management

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate-Term Financing

Financing with Derivatives

A: Financing with Derivatives

Risk Management

International Financial Management

Corporate Restructuring

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