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Exam 12: Leverage and Capital Structure

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Question 81

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Poor capital structure decisions can result in ________ the cost of capital, resulting in ________ acceptable investments. Effective capital structure decisions can ________ the cost of capital, resulting in ________ acceptable investments.

A) increasing; fewer; lower; more
B) decreasing; more; higher; fewer
C) increasing; more; lower, fewer
D) decreasing; fewer; higher; more

E) B) and C)
F) A) and D)

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Question 82

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The major shortcoming of the EBIT-EPS approach to capital structure is that

A) the technique does not promote the maximization of shareholder wealth.
B) the technique does not consider the cost of capital.
C) the technique only considers leverage-related risk.
D) the technique does not maximize earnings per share.

E) B) and C)
F) B) and D)

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Question 83

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An increase in fixed operating costs will result in ________ in the degree of operating leverage.

The per dollar contribution toward fixed operating costs and profits provided by each dollar of sales is the

The breakeven point in dollars can be computed by dividing the contribution margin into the fixed operating costs.

At a base sales level of $400,000, a firm has a degree of operating leverage of 2 and a degree of financial leverage of 1.5. The firm's degree of total leverage is ________.

________ analysis is a technique used to assess the returns associated with various cost structures and levels of sales.

Table 12.1 -Which plan has a higher degree of financial leverage and financial risk? (See Table 12.1)

At the operating breakeven point, ________ equals zero.

The basic shortcoming of EBIT-EPS analysis is that this model focuses on the maximization of earnings rather than on the maximization of share price.

Firm's capital structure is the mix of the short-term debt, long-term debt, and equity maintained by the firm.

At the operating breakeven point, the sales revenue is equal to the sum of the fixed and variable operating costs.

The probability that a firm will become bankrupt is largely dependent on its level of both business risk and financial risk.

Because the degree of total leverage is multiplicative and not additive, when a firm has very high operating leverage it can moderate its total risk by

The firm's operating breakeven point is the level of sales necessary to cover all fixed operating costs.

In the traditional approach to capital structure, as the amount of debt increases in a firm's capital structure,

________ risk is the risk of being unable to cover operating costs.

Firms having stable and predictable revenues can more safely employ highly leveraged capital structures than can firms with volatile patterns of sales revenue.

In general, a firm's theoretical optimal capital structure is that which balances the tax disadvantage of debt financing against the increase probability of bankruptcy that results from its use.

The risk of the debt capital is less than that of other long-term contributors of capital because