Exam 12: Determining the Financing Mix

Capital structure is the mix of the long-term sources of funds used by the firm.

Because there are no fixed financing costs,a common stock plan line in an EBIT-EPS analysis chart will have a less-steep slope than will a bond-plan line.

Techno Robots produces a functioning toy robot.At a production and sales level of 10,000 robots,the firm has the following information: Selling price per unit = $15 Variable costs per unit = $8 EBIT = $17,500 a.What is the break-even point in units for the firm?

Potential applications of the break-even model include

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.

A firm's cost of capital is not affected by the composition of the right-hand side of the firm's balance sheet,but rather is determined by the firm's mix of assets.

Break-even analysis is a short-term concept because,in the long run,all costs are variable.

A firm that uses large amounts of debt financing in an industry characterized by a high degree of business risk would have ________ earnings per share fluctuations resulting from changes in levels of sales.

Fixed costs per unit vary inversely with production output.

Financial leverage is typically more under the control of management than is operating leverage because the nature of the product often dictates the type of production process needed.

Financial leverage has to do with:

Financial structure is equal to non-interest bearing liabilities,such as accounts payable and accruals,plus capital structure,which includes short- and long-term debt,preferred stock,and common equity.

Wheely Bike Manufacturers expects to produce and sell 9,000 made-to-order bicycles this year.Variable costs are 40 percent of sales while fixed costs total $600,000.At what price must each bicycle be sold for Wheely to earn EBIT of $450,000?

Amish Enterprises makes wooden play sets.The company pays annual rent of $400,000 per year and pays administrative salaries totaling $150,000 per year.Each play set requires $400 of wood,ten hours of labor at $70 per hour,and variable overhead costs of $100.Fixed advertising expenses equal $100,000 per year.Each play set sells for $3,200.What is Amish Enterprises' break-even output level?

ABC Corp.has estimated the following income statement for its next fiscal year. a.What is the break-even point in sales dollars for the firm? b.If the average unit cost is $20,what is the break even point in units?

Raising funds internally is effectively increasing the investment of the firm's existing common shareholders.

Fixed costs are called indirect costs while variable costs are called direct costs.

Because fixed costs do not vary with a firm's revenues,firm's with high levels of fixed cost enjoy lower levels of operating risk because their costs are more certain,making budgeting easier.

Depreciation is considered a fixed cost.

Optimal capital structure is: