Question 1

The percentage change in earnings per share (EPS) that results from a given percentage change in sales is known as the firm's degree of_____ leverage.

Accepted Answer

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

Question 2

A firm's risk can be partitioned into financial risk and business risk. An increase in the financial risk results in a decrease in business risk.

Accepted Answer

A) True 
 B)False

Question 3

The combination of debt financing and equity financing that maximizes a firm's value is known as its:

Accepted Answer

A) optimum degree of financial leverage (DFL). 
B) maximum weighted average cost of capital (WAC
C) . 
C) maximum business risk. 
D) optimal capital structure. 
E) optimal indifference point. 
A) optimum degree of financial leverage (DFL). 
B) maximum weighted average cost of capital (WAC
C) . 
C) maximum business risk. 
D) optimal capital structure. 
E) optimal indifference point.

Question 4

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

Accepted Answer

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

Question 5

A firm's ______ is the combination of debt and equity it uses to finance its assets.

Accepted Answer

A) capital budgeting plan 
B) business risk 
C) asset structure 
D) securitization table 
E) capital structure 
A) capital budgeting plan 
B) business risk 
C) asset structure 
D) securitization table 
E) capital structure

Question 6

What is the formula for calculating the times-interest earned (TIE) ratio?

Accepted Answer

A) TIE ratio = Interest charges ÷ Total liabilities 
B) TIE ratio = Earnings per share ÷ Interest charges 
C) TIE ratio = Sales ÷ Interest charges 
D) TIE ratio = Earnings before interest and taxes ÷ Interest charges 
E) TIE ratio = Interest charges ÷ Net income 
A) TIE ratio = Interest charges ÷ Total liabilities 
B) TIE ratio = Earnings per share ÷ Interest charges 
C) TIE ratio = Sales ÷ Interest charges 
D) TIE ratio = Earnings before interest and taxes ÷ Interest charges 
E) TIE ratio = Interest charges ÷ Net income

Question 7

It is fairly easy to determine how changes in a firm's degree of financial leverage (DFL) affect its P/E ratio.

Accepted Answer

A) True 
 B)False

Question 8

Everything else equal, if a firm with favorable future prospects raises funds by issuing new shares of common stock, _____.

Accepted Answer

A) its debt/assets ratio should increase 
B) its marginal bankruptcy-related costs should increase 
C) its retained earnings will increase immediately 
D) its taxable income should decrease 
E) the price of its stock will increase when future profits are realized by the firm 
A) its debt/assets ratio should increase 
B) its marginal bankruptcy-related costs should increase 
C) its retained earnings will increase immediately 
D) its taxable income should decrease 
E) the price of its stock will increase when future profits are realized by the firm

Question 9

Which of the following statements concerning capital structures around the world is correct?

Accepted Answer

A) There have been no significant observed differences between the capital structures of U.S. corporations and their German and Japanese counterparts. 
B) All countries use essentially the same international accounting conventions with respect to reporting assets on foreign companies' financial statements. 
C) Differences among countries in both bankruptcy costs and equity reporting costs leads to the conclusion that U.S. firms should have more equity and less debt than firms in Japan and Germany. 
D) Equity monitoring costs are higher in the United States than in Japan and Germany. 
E) Debt monitoring costs are lower in the United States than in Japan and Germany. 
A) There have been no significant observed differences between the capital structures of U.S. corporations and their German and Japanese counterparts. 
B) All countries use essentially the same international accounting conventions with respect to reporting assets on foreign companies' financial statements. 
C) Differences among countries in both bankruptcy costs and equity reporting costs leads to the conclusion that U.S. firms should have more equity and less debt than firms in Japan and Germany. 
D) Equity monitoring costs are higher in the United States than in Japan and Germany. 
E) Debt monitoring costs are lower in the United States than in Japan and Germany.

Question 10

A firm's assets are finance with 60 percent debt and 40 percent common equity. As a result, we know that the firm must have:

Accepted Answer

A) a degree of operating leverage (DOL) that is greater than 1.0. 
B) a degree of financial leverage (DFL) that is greater than 1.0. 
C) a degree of equity leverage (DEL) that is greater than 1.0. 
D) fixed operating costs. 
E) paid common stock dividends last year. 
A) a degree of operating leverage (DOL) that is greater than 1.0. 
B) a degree of financial leverage (DFL) that is greater than 1.0. 
C) a degree of equity leverage (DEL) that is greater than 1.0. 
D) fixed operating costs. 
E) paid common stock dividends last year.

Question 11

Suppose that a firm has a degree of financial leverage (DFL) that is greater than 1.0; that is, DFL > 1. If the firm's sales decrease by 1 percent, its ______ will decrease by more than 1 percent.

Accepted Answer

A) earnings per share (EPS) 
B) net operating income (NOI) 
C) interest expense 
D) variable costs 
E) fixed financing costs 
A) earnings per share (EPS) 
B) net operating income (NOI) 
C) interest expense 
D) variable costs 
E) fixed financing costs

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

A degree of operating leverage (DOL) equal to 1.5 times indicates that for every 1 percent change in _____.

Accepted Answer

A) earnings per share (EPS) there will be a 1.5 percent change in sales 
B) interest there will be a 1.5 percent change in earnings before interest and taxes (EBIT) 
C) sales there will be a 1.5 percent change in earnings before interest and taxes (EBIT) 
D) earnings before interest and taxes (EBIT) there will be a 1.5 percent change in earnings per share (EPS) 
E) sales there will be a 1.5 percent change in earnings per share (EPS) 
A) earnings per share (EPS) there will be a 1.5 percent change in sales 
B) interest there will be a 1.5 percent change in earnings before interest and taxes (EBIT) 
C) sales there will be a 1.5 percent change in earnings before interest and taxes (EBIT) 
D) earnings before interest and taxes (EBIT) there will be a 1.5 percent change in earnings per share (EPS) 
E) sales there will be a 1.5 percent change in earnings per share (EPS)

Question 14

If the debt/assets ratio increases, the costs of both debt and equity normally decrease.

Accepted Answer

A) True 
 B)False

Question 15

A company's capital structure consists of common stock only, which amounts to $14 million. However, this year, the company plans to issue $7 million of debt, and use the proceeds to repurchase $7 million of its existing equity. The stock repurchase should not change the size of the company. As a result, any change in the firm's earnings per share (EPS) must be a result of the change in its:

Accepted Answer

A) level of operations. 
B) beta coefficient. 
C) EPS coefficient of variation. 
D) capital structure. 
E) EPS standard deviation. 
A) level of operations. 
B) beta coefficient. 
C) EPS coefficient of variation. 
D) capital structure. 
E) EPS standard deviation.

Question 16

Bell Brothers has $3,000,000 in sales. Its fixed costs are estimated to be $200,000, and its variable costs are equal to 50 percent of sales. The company has $1,000,000 in debt outstanding with a before-tax cost of 10 percent. If Bell Brothers' sales increase by 20 percent, by what percent should its earnings per share (EPS) change?

Accepted Answer

A) 16.00% 
B) 20.00% 
C) 21.67% 
D) 23.08% 
E) 25.00% 
A) 16.00% 
B) 20.00% 
C) 21.67% 
D) 23.08% 
E) 25.00%

Question 17

A firm expects to have a 15 percent increase in sales this year. If its degree of operating leverage is 1.2 and its degree of financial leverage is 3.5, what will be the percentage change in earnings per share (EPS) this year?

Accepted Answer

A) 4.2% 
B) 48.05% 
C) 63.0% 
D) 52.5% 
E) 18.0% 
A) 4.2% 
B) 48.05% 
C) 63.0% 
D) 52.5% 
E) 18.0%

Question 18

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

Accepted Answer

A) For every 1 percent change in its sales, the firm's EBIT will change by 2 percent. 
B) For every 1 percent change in its EPS, the firm's sales will change by 0.5 percent. 
C) For every 1 percent change in its EBIT, the firm's EPS will change by 2 percent. 
D) For every 1 percent change in its EPS, the firm's EBIT will change by 0.5 percent. 
E) For every 1 percent change in its EBIT, the firm's sales will change by 2 percent. 
A) For every 1 percent change in its sales, the firm's EBIT will change by 2 percent. 
B) For every 1 percent change in its EPS, the firm's sales will change by 0.5 percent. 
C) For every 1 percent change in its EBIT, the firm's EPS will change by 2 percent. 
D) For every 1 percent change in its EPS, the firm's EBIT will change by 0.5 percent. 
E) For every 1 percent change in its EBIT, the firm's sales will change by 2 percent.

Question 19

At the time Modigliani and Miller (MM) developed their capital structure theory, the assumptions that they made were realistic.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following situations would intensify the business risk borne by a firm's common stockholders?

Accepted Answer

A) The firm issues new fixed-income securities, such as bonds, to raise funds to support operations. 
B) The firm takes actions to stabilize its annual sales. 
C) The firm starts purchasing from a supplier that allows it to renegotiate raw materials costs every six months. 
D) The firm reduces its use of fixed operating costs. 
E) The firm issues new common stock to raise funds. 
A) The firm issues new fixed-income securities, such as bonds, to raise funds to support operations. 
B) The firm takes actions to stabilize its annual sales. 
C) The firm starts purchasing from a supplier that allows it to renegotiate raw materials costs every six months. 
D) The firm reduces its use of fixed operating costs. 
E) The firm issues new common stock to raise funds.

The percentage change in earnings per share (EPS) that results from a given percentage change in sales is known as the firm's degree of_____ leverage.

A firm's risk can be partitioned into financial risk and business risk. An increase in the financial risk results in a decrease in business risk.

The combination of debt financing and equity financing that maximizes a firm's value is known as its:

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

A firm's ______ is the combination of debt and equity it uses to finance its assets.

What is the formula for calculating the times-interest earned (TIE) ratio?

It is fairly easy to determine how changes in a firm's degree of financial leverage (DFL) affect its P/E ratio.

Everything else equal, if a firm with favorable future prospects raises funds by issuing new shares of common stock, _____.

Which of the following statements concerning capital structures around the world is correct?

A firm's assets are finance with 60 percent debt and 40 percent common equity. As a result, we know that the firm must have:

Suppose that a firm has a degree of financial leverage (DFL) that is greater than 1.0; that is, DFL > 1. If the firm's sales decrease by 1 percent, its ______ will decrease by more than 1 percent.

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

A degree of operating leverage (DOL) equal to 1.5 times indicates that for every 1 percent change in _____.

If the debt/assets ratio increases, the costs of both debt and equity normally decrease.

A firm expects to have a 15 percent increase in sales this year. If its degree of operating leverage is 1.2 and its degree of financial leverage is 3.5, what will be the percentage change in earnings per share (EPS) this year?

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

At the time Modigliani and Miller (MM) developed their capital structure theory, the assumptions that they made were realistic.

Which of the following situations would intensify the business risk borne by a firm's common stockholders?

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 Debt Characteristics 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

The percentage change in earnings per share (EPS) that results from a given percentage change in sales is known as the firm's degree of_____ leverage.

A firm's risk can be partitioned into financial risk and business risk. An increase in the financial risk results in a decrease in business risk.

The combination of debt financing and equity financing that maximizes a firm's value is known as its:

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

A firm's ______ is the combination of debt and equity it uses to finance its assets.

What is the formula for calculating the times-interest earned (TIE) ratio?

It is fairly easy to determine how changes in a firm's degree of financial leverage (DFL) affect its P/E ratio.

Everything else equal, if a firm with favorable future prospects raises funds by issuing new shares of common stock, _____.

Which of the following statements concerning capital structures around the world is correct?

A firm's assets are finance with 60 percent debt and 40 percent common equity. As a result, we know that the firm must have:

Suppose that a firm has a degree of financial leverage (DFL) that is greater than 1.0; that is, DFL > 1. If the firm's sales decrease by 1 percent, its ______ will decrease by more than 1 percent.

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

A degree of operating leverage (DOL) equal to 1.5 times indicates that for every 1 percent change in _____.

If the debt/assets ratio increases, the costs of both debt and equity normally decrease.

A firm expects to have a 15 percent increase in sales this year. If its degree of operating leverage is 1.2 and its degree of financial leverage is 3.5, what will be the percentage change in earnings per share (EPS) this year?

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

At the time Modigliani and Miller (MM) developed their capital structure theory, the assumptions that they made were realistic.

Which of the following situations would intensify the business risk borne by a firm's common stockholders?

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 Debt Characteristics 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