Question 1

Using debt and preferred stock in the capital structure of a firm will _____.

Accepted Answer

A)  increase financial risk 
B)  decrease business risk 
C)  increase the tax payableby the firm. 
D)  decrease operating leverage 
E)  increase the book value of common stock 
A)  increase financial risk 
B)  decrease business risk 
C)  increase the tax payableby the firm. 
D)  decrease operating leverage 
E)  increase the book value of common stock

Question 2

Trueware Corporation is a start-up firm that has a capital structure that calls for a debt/assets ratio of 0.25. The firm has two possible scenarios for its operations: Ruby or Emerald. The Ruby scenario has a 70 percent probability of occurring and forecast earnings before interest and taxes (EBIT) in this state is $80,000. The Emerald state has a 30 percent chance of occurring and the EBIT is expected to be $32,000. Further, the cost of debt for this capital structure will be 10 percent. The firm will have $500,000 in total assets and it will face a marginal tax rate of 30 percent. The company has 22,000 outstanding shares. Calculate the difference in EPS for the capital structure.

Accepted Answer

A)  $1.0 
B)  $1.20 
C)  $1.48 
D)  $2.24 
E)  $3.15 
A)  $1.0 
B)  $1.20 
C)  $1.48 
D)  $2.24 
E)  $3.15

Question 3

Which of the following statements is true about the relationship between the debt/assets ratio and the times-interest-earned ratio (TIE) of a firm?

Accepted Answer

A)  If the debt/assets ratio increases, the TIE ratio will also increase. 
B)  If the debt/assets ratio decreases, the TIE ratio will increase. 
C)  If the debt/assets ratio decreases, the TIE ratio will also decrease. 
D)  The debt/assets ratio will always be equal to the TIE ratio. 
E)  The debt/assets ratio and the TIE ratio are not related to each other. 
A)  If the debt/assets ratio increases, the TIE ratio will also increase. 
B)  If the debt/assets ratio decreases, the TIE ratio will increase. 
C)  If the debt/assets ratio decreases, the TIE ratio will also decrease. 
D)  The debt/assets ratio will always be equal to the TIE ratio. 
E)  The debt/assets ratio and the TIE ratio are not related to each other.

Question 4

Which of the following is true of the capital structure of a company from a tax standpoint?

Accepted Answer

A)  In countries where there are no taxes, corporations are inclined to use debt. 
B)  In countries where capital gains are taxed, investors should show preference for debt. 
C)  In countries where capital gains are not taxed, equity capital costs should be high. 
D)  In countries where dividends are not taxed, the investors should show preference for debt. 
E)  In countries where capital gains are not taxed, investors should show preference for stocks. 
A)  In countries where there are no taxes, corporations are inclined to use debt. 
B)  In countries where capital gains are taxed, investors should show preference for debt. 
C)  In countries where capital gains are not taxed, equity capital costs should be high. 
D)  In countries where dividends are not taxed, the investors should show preference for debt. 
E)  In countries where capital gains are not taxed, investors should show preference for stocks.

Question 5

A times-interest-earned (TIE) ratio of less than 1 indicates _____.

Accepted Answer

A)  a less debt in the capital structure of the firm 
B)  a low probability that the firm will default 
C)  the firm's inability to meet its annual interest obligations 
D)  that the firm is financed only by equity 
E)  that the debt/assets ratio of the firm is very low 
A)  a less debt in the capital structure of the firm 
B)  a low probability that the firm will default 
C)  the firm's inability to meet its annual interest obligations 
D)  that the firm is financed only by equity 
E)  that the debt/assets ratio of the firm is very low

Question 6

What is the cause of financial risks that are placed on the common stockholders of a firm?

Accepted Answer

A)  Unstable sales volume 
B)  Uncertain input price 
C)  Use of fixed-income securities 
D)  High fixed operating costs 
E)  Inability to adjust to selling prices 
A)  Unstable sales volume 
B)  Uncertain input price 
C)  Use of fixed-income securities 
D)  High fixed operating costs 
E)  Inability to adjust to selling prices

Question 7

The situation in which managers have different (better) information about their firm's prospects than outside investors is known as _____.

Accepted Answer

A)  symmetric information 
B)  contingent information 
C)  asymmetric information 
D)  favorable information 
E)  unfavorable information 
A)  symmetric information 
B)  contingent information 
C)  asymmetric information 
D)  favorable information 
E)  unfavorable information

Question 8

Quick Launch Rocket Company, expects its sales to increase by 50 percent in the coming year as a result of NASA's recent problems with the space shuttle. The firm's current earnings per share (EPS) is $3.25. Its degree of operating leverage is 1.6, while its degree of financial leverage is 2.1. What is the firm's projected EPS for the coming year using the degree of total leverage (DTL) approach?

Accepted Answer

A)  $3.25 
B)  $5.46 
C)  $10.92 
D)  $8.71 
E)  $19.63 
A)  $3.25 
B)  $5.46 
C)  $10.92 
D)  $8.71 
E)  $19.63

Question 9

Which of the following is true of the advantages of raising corporate debt through bank loans?

Accepted Answer

A)  Capital gains on debt are not taxed. 
B)  Costs associated with monitoring debt are low. 
C)  Equity capital costs are low. 
D)  Corporations are equally inclined to use debt and equity. 
E)  The threat of potential bankruptcy is high in equity financing compared to bank loans. 
A)  Capital gains on debt are not taxed. 
B)  Costs associated with monitoring debt are low. 
C)  Equity capital costs are low. 
D)  Corporations are equally inclined to use debt and equity. 
E)  The threat of potential bankruptcy is high in equity financing compared to bank loans.

Question 10

Equity monitoring costs are lower in the United States than in other countries because:

Accepted Answer

A)  the corporate debt in U.S. companies consists of bank loans. 
B)  capital gains are not taxed in the U.S. unless they exceed some minimum amount. 
C)  U.S. companies must comply with relatively stringent audit requirements. 
D)  dividends in the U.S. are tax-exempt. 
E)  U.S. banks are more directly involved with the debtor firms' affairs. 
A)  the corporate debt in U.S. companies consists of bank loans. 
B)  capital gains are not taxed in the U.S. unless they exceed some minimum amount. 
C)  U.S. companies must comply with relatively stringent audit requirements. 
D)  dividends in the U.S. are tax-exempt. 
E)  U.S. banks are more directly involved with the debtor firms' affairs.

Question 11

Which of the following is true of the degree of financial leverage of a firm?

Accepted Answer

A)  The degree of financial leverage affects the earnings before interest and taxes of the firm. 
B)  The degree of financial leverage is defined as the percentage change in net operating income with a given percentage change in sales. 
C)  A lower degree of financial leverage suggests that higher risk is associated with the firm's normal operating activities. 
D)  The degree of financial leverage affects the operating section of the income statement. 
E)  A higher degree of financial leverage suggests that higher risk is associated with the firm's mix of debt and equity financing. 
A)  The degree of financial leverage affects the earnings before interest and taxes of the firm. 
B)  The degree of financial leverage is defined as the percentage change in net operating income with a given percentage change in sales. 
C)  A lower degree of financial leverage suggests that higher risk is associated with the firm's normal operating activities. 
D)  The degree of financial leverage affects the operating section of the income statement. 
E)  A higher degree of financial leverage suggests that higher risk is associated with the firm's mix of debt and equity financing.

Question 12

Which of the following countries uses the lowest proportion of debt among the industrialized countries?

Accepted Answer

A)  The United States 
B)  Canada 
C)  Italy 
D)  The United Kingdom 
E)  Japan 
A)  The United States 
B)  Canada 
C)  Italy 
D)  The United Kingdom 
E)  Japan

Question 13

What does a degree of financial leverage (DFL) of 2.0 indicate?

Accepted Answer

A)  For every 1 percent change in sales, the EBIT will change by 2 percent. 
B)  For every 1 percent change in EPS, the sales will change by 2 percent. 
C)  For every 1 percent change in EBIT, the EPS will change by 2 percent. 
D)  For every 1 percent change in EPS, the EBIT will change by 2 percent. 
E)  For every 1 percent change in EBIT, the sales will change by 2 percent. 
A)  For every 1 percent change in sales, the EBIT will change by 2 percent. 
B)  For every 1 percent change in EPS, the sales will change by 2 percent. 
C)  For every 1 percent change in EBIT, the EPS will change by 2 percent. 
D)  For every 1 percent change in EPS, the EBIT will change by 2 percent. 
E)  For every 1 percent change in EBIT, the sales will change by 2 percent.

Question 14

Bell Brothers has $3,000,000 in sales. Its fixed costs are estimated to be $100,000, and its variable costs are equal to fifty cents for every dollar of sales. The company has $1,000,000 in debt outstanding at a before-tax cost of 10 percent. If Bell Brothers' sales were to increase by 20 percent, how much of a percentage increase can one expect in the company's net income?

Accepted Answer

A)  15.66% 
B)  18.33% 
C)  19.24% 
D)  21.50% 
E)  23.08% 
A)  15.66% 
B)  18.33% 
C)  19.24% 
D)  21.50% 
E)  23.08%

Question 15

Which of the following plays an important role in determining the capital structure of a firm?

Accepted Answer

A)  Managerial attitudes 
B)  Reserve borrowing capacity 
C)  Shareholders' expectations 
D)  Asymmetric information 
E)  Bankruptcy-related costs 
A)  Managerial attitudes 
B)  Reserve borrowing capacity 
C)  Shareholders' expectations 
D)  Asymmetric information 
E)  Bankruptcy-related costs

Question 16

Which of the following is affected by financial leverage?

Accepted Answer

A)  Earnings per share 
B)  Net operating income 
C)  Sales 
D)  Variable costs 
E)  Fixed costs 
A)  Earnings per share 
B)  Net operating income 
C)  Sales 
D)  Variable costs 
E)  Fixed costs

Question 17

If a high percentage of a firm's operating costs are fixed and hence do not decline when demand falls off, this will _____.

Accepted Answer

A)  decrease financial leverage 
B)  optimize the capital structure of the firm 
C)  increase the business risk of the firm 
D)  decrease the firm-specific risk of the firm 
E)  intensify the risk borne by thefirm's common stockholders 
A)  decrease financial leverage 
B)  optimize the capital structure of the firm 
C)  increase the business risk of the firm 
D)  decrease the firm-specific risk of the firm 
E)  intensify the risk borne by thefirm's common stockholders

Question 18

The percentage change in earnings per share (EPS) that results from a given percentage change in sales is known as the _____.

Accepted Answer

A)  degree of financial leverage 
B)  degree of operating leverage 
C)  degree of working capital leverage 
D)  degree of current asset leverage 
E)  degree of total leverage 
A)  degree of financial leverage 
B)  degree of operating leverage 
C)  degree of working capital leverage 
D)  degree of current asset leverage 
E)  degree of total leverage

Question 19

Companies in Italy and Japan use less debt in their capital structures than companies in the United States or Canada.

Accepted Answer

A) True 
 B)False

Question 20

The degree of financial leverage is defined as _____.

Accepted Answer

A)  the percentage change in EBIT that results from a given percentage change in sales 
B)  the percentage change in sales that results from a given percentage change in EPS 
C)  the percentage change in EPS that results from a given percentage change in sales 
D)  the percentage change in EPS that results from a given percentage change in EBIT 
E)  the percentage change in sales that results from a given percentage change in EBIT 
A)  the percentage change in EBIT that results from a given percentage change in sales 
B)  the percentage change in sales that results from a given percentage change in EPS 
C)  the percentage change in EPS that results from a given percentage change in sales 
D)  the percentage change in EPS that results from a given percentage change in EBIT 
E)  the percentage change in sales that results from a given percentage change in EBIT

Using debt and preferred stock in the capital structure of a firm will _____.

Which of the following statements is true about the relationship between the debt/assets ratio and the times-interest-earned ratio (TIE) of a firm?

Which of the following is true of the capital structure of a company from a tax standpoint?

A times-interest-earned (TIE) ratio of less than 1 indicates _____.

What is the cause of financial risks that are placed on the common stockholders of a firm?

The situation in which managers have different (better) information about their firm's prospects than outside investors is known as _____.

Which of the following is true of the advantages of raising corporate debt through bank loans?

Equity monitoring costs are lower in the United States than in other countries because:

Which of the following is true of the degree of financial leverage of a firm?

Which of the following countries uses the lowest proportion of debt among the industrialized countries?

What does a degree of financial leverage (DFL) of 2.0 indicate?

Which of the following plays an important role in determining the capital structure of a firm?

Which of the following is affected by financial leverage?

If a high percentage of a firm's operating costs are fixed and hence do not decline when demand falls off, this will _____.

The percentage change in earnings per share (EPS) that results from a given percentage change in sales is known as the _____.

Companies in Italy and Japan use less debt in their capital structures than companies in the United States or Canada.

The degree of financial leverage is defined as _____.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters

Exam 12: Capital Structure

Using debt and preferred stock in the capital structure of a firm will _____.

Which of the following statements is true about the relationship between the debt/assets ratio and the times-interest-earned ratio (TIE) of a firm?

Which of the following is true of the capital structure of a company from a tax standpoint?

A times-interest-earned (TIE) ratio of less than 1 indicates _____.

What is the cause of financial risks that are placed on the common stockholders of a firm?

The situation in which managers have different (better) information about their firm's prospects than outside investors is known as _____.

Which of the following is true of the advantages of raising corporate debt through bank loans?

Equity monitoring costs are lower in the United States than in other countries because:

Which of the following is true of the degree of financial leverage of a firm?

Which of the following countries uses the lowest proportion of debt among the industrialized countries?

What does a degree of financial leverage (DFL) of 2.0 indicate?

Which of the following plays an important role in determining the capital structure of a firm?

Which of the following is affected by financial leverage?

If a high percentage of a firm's operating costs are fixed and hence do not decline when demand falls off, this will _____.

The percentage change in earnings per share (EPS) that results from a given percentage change in sales is known as the _____.

Companies in Italy and Japan use less debt in their capital structures than companies in the United States or Canada.

The degree of financial leverage is defined as _____.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters