Question 1

From the table above we can conclude:

Accepted Answer

A) Waltham has a conservative capital structure policies. 
B) Waltham has too much debt. 
C) Waltham uses more leverage than the typical firm in its industry. 
D) Waltham's EPS would be more sensitive than a typical firm's to changes in EBIT. 
A) Waltham has a conservative capital structure policies. 
B) Waltham has too much debt. 
C) Waltham uses more leverage than the typical firm in its industry. 
D) Waltham's EPS would be more sensitive than a typical firm's to changes in EBIT.

Question 2

The level of EBIT that will equate EPS between two different financing plans is called the:

Accepted Answer

A) indifference point. 
B) optimal capital plan. 
C) break-even point. 
D) both A and C. 
A) indifference point. 
B) optimal capital plan. 
C) break-even point. 
D) both A and C.

Question 3

A company whose rate of return on investments is higher than the interest rate on its debt is said to have:

Accepted Answer

A) unfavorable financial leverage. 
B) a sub-optimal capital structure. 
C) favorable financial leverage. 
D) negative financial leverage. 
A) unfavorable financial leverage. 
B) a sub-optimal capital structure. 
C) favorable financial leverage. 
D) negative financial leverage.

Question 4

Use the following information to answer the following question(s).
Your firm is trying to determine whether it should finance a project requiring $800,000 with new common stock or with debt.The firm is faced with the following financing alternatives:
   The firm has a marginal tax rate of 34%,the company currently has 40,000 shares of common stock outstanding,and $90,000 face value of 10% debt outstanding.
-The indifference level of EBIT is:

Accepted Answer

A) $99,000. 
B) $66,600. 
C) $333,000. 
D) $297,000. 
A) $99,000. 
B) $66,600. 
C) $333,000. 
D) $297,000.

Question 5

When using an EPS-EBIT chart to evaluate a pure debt financing and pure equity financing plan,the debt financing plan line will have:

Accepted Answer

A) a steeper slope than the equity financing plan line. 
B) a slower rate of change as EBIT increases. 
C) a downward slope. 
D) the same slope as the equity plan,but a higher intercept. 
A) a steeper slope than the equity financing plan line. 
B) a slower rate of change as EBIT increases. 
C) a downward slope. 
D) the same slope as the equity plan,but a higher intercept.

Question 6

If a firm chose to increase its debt ratio from 20% to 40%,what is the potential risk?

Accepted Answer

A) The average cost of capital would most likely rise. 
B) The price of the firm's common stock would definitely decline. 
C) If economic forces cause a reduction of sales,the firm's EPS might decline. 
D) The firm's WACC might decline. 
A) The average cost of capital would most likely rise. 
B) The price of the firm's common stock would definitely decline. 
C) If economic forces cause a reduction of sales,the firm's EPS might decline. 
D) The firm's WACC might decline.

Question 7

Benchmarking the company's capital structure is popular because it is impossible to know exactly what the company's optimal capital structure should be.

Accepted Answer

A) True 
 B)False

Question 8

When the impact of taxes is considered,as the firm takes on more debt

Accepted Answer

A) there will be no change in total cash flows. 
B) both taxes and total cash flow to stockholders and bondholders will decrease. 
C) cash flows will increase because taxes will decrease. 
D) the weighted average cost of capital will increase. 
A) there will be no change in total cash flows. 
B) both taxes and total cash flow to stockholders and bondholders will decrease. 
C) cash flows will increase because taxes will decrease. 
D) the weighted average cost of capital will increase.

From the table above we can conclude:

The level of EBIT that will equate EPS between two different financing plans is called the:

A company whose rate of return on investments is higher than the interest rate on its debt is said to have:

When using an EPS-EBIT chart to evaluate a pure debt financing and pure equity financing plan,the debt financing plan line will have:

If a firm chose to increase its debt ratio from 20% to 40%,what is the potential risk?

Benchmarking the company's capital structure is popular because it is impossible to know exactly what the company's optimal capital structure should be.

When the impact of taxes is considered,as the firm takes on more debt

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements, taxes, and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Risk and Return-Capital Market Theory

Debt Valuation and Interest Rates

Stock Valuation

Investment Decision Criteria

Analyzing Project Cash Flows

Risk Analysis and Project Evaluation

The Cost of Capital

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Corporate Risk Management

Filters

Exam 15: Capital Structure Policy

From the table above we can conclude:

The level of EBIT that will equate EPS between two different financing plans is called the:

A company whose rate of return on investments is higher than the interest rate on its debt is said to have:

When using an EPS-EBIT chart to evaluate a pure debt financing and pure equity financing plan,the debt financing plan line will have:

If a firm chose to increase its debt ratio from 20% to 40%,what is the potential risk?

Benchmarking the company's capital structure is popular because it is impossible to know exactly what the company's optimal capital structure should be.

When the impact of taxes is considered,as the firm takes on more debt

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements, taxes, and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Risk and Return-Capital Market Theory

Debt Valuation and Interest Rates

Stock Valuation

Investment Decision Criteria

Analyzing Project Cash Flows

Risk Analysis and Project Evaluation

The Cost of Capital

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Corporate Risk Management

Filters