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Exam 12: Determining the Financing Mix

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Question 61

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A plant may remain operating when sales are depressed

A) if the selling price per unit exceeds the variable cost per unit.
B) to help the local economy.
C) in an effort to cover at least some of the variable cost.
D) unless variable costs are zero when production is zero.

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Question 62

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Financial leverage could mean financing some of a firm's assets with

A) preferred stock.
B) retained earnings.
C) private equity capital.
D) sales revenues.

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Question 63

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The optimal capital structure occurs when operating leverage equals financial leverage.

Variable costs include all of the following except:

The primary weakness of EBIT-EPS analysis is that

Sunshine Candy Company's capital structure for the past year of operation is shown below. The federal tax rate is 50 percent.Sunshine Candy Company,home-based in Orlando,wants to raise an additional $1,000,000 to open new facilities in Tampa and Miami.The firm can accomplish this via two alternatives: (1)It can sell a new issue of 20-year debentures with 16 percent interest; or (2)20,000 new shares of common stock can be sold to the public to net the candy company $50 per share.A recent study,performed by an outside consulting organization,projected Sunshine Candy Company's long-term EBIT level at approximately $6,800,000.Find the indifference level of EBIT (with regard to earnings per share)between the suggested financing plans.

Which of the following statements about financial leverage is true?

Which of the following statements about operating leverage is true?

All of the following are likely to result in the use of less debt in a company's capital structure except:

Financial risk applies to both the additional variability in earnings available to common shareholders and the additional chance of insolvency caused by the use of financial leverage.

If sales double,the break-even model assumes that total variable costs will double.

The objective of capital structure management is to maximize the market value of the firm's common stock.

Private equity funds tend to focus their investments in situations where promised returns are very high and the need for funds is brief.

An EBIT-EPS analysis allows the decision maker to visualize the impact of different financing plans on EPS over a range of EBIT levels.

The moderate view of capital structure theory allows for the tax-deductibility of interest expense.

Assuming no corporate taxes,the independence hypothesis suggests that a firm's weighted average cost of capital will

Stan's Cans,Inc.expects to earn $150,000 next year after taxes on sales of $2,200,000.Stan's manufactures only one size of garbage can.Stan sells his cans for $8 apiece and they have a variable cost of $2.40 apiece.Stan's tax rate is currently 34%. a.What are the firm's expected fixed costs for next year? b.What is the break-even point in units?

Break-even analysis assumes that a multiproduct firm maintains a constant production and sales mix.

Which of the following would be considered the firm's optimal capital structure?

If we ignore bankruptcy and agency costs then the optimal capital structure for a firm under the moderate view would be 100% debt.