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Question
The amount of leverage in a firm's capital structurethe mix of long-term debt and equity maintained by the firmcan significantly affect its value by affecting return and risk.Answer
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Related questions
Q:
Earnings before interest and taxes are positive above the operating breakeven point, and a loss occurs below it.
Q:
Both operating and financial leverage result in the magnification of return as well as risk.
Q:
Total leverage can be defined as the potential use of fixed costs, both operating and financial, to magnify the effect of changes in sales on a firm's earnings per share.
Q:
Table 1 What is the EPS under Financing Plan 1, if the firm projects EBIT of $200,000 and has a tax rate of 40 percent? (See Table 12.1)
Q:
Table 1 Assuming a 40 percent tax rate, what is the financial breakeven point for each plan? (See Table 12.1)
Q:
The basic shortcoming of the EBIT-EPS approach to capital structure is ________.
A) that the optimal capital structure is difficult to compute
B) its disregard for the presence of preferred stock in the capital structure
C) its disregard for the firm's dividend policy
D) that it concentrates on the maximization of EPS rather than the maximization of owner's wealth
Q:
The closer the base sales level used is to the operating breakeven point, the smaller the operating leverage.
Q:
The degree of operating leverage will increase if a firm decides to compensate its sales representatives with a fixed salary and bonus rather than with a pure percent-of-sales commission.
Q:
One function of breakeven analysis is to ________.
A) determine the profit attributable to each stockholder
B) evaluate the effect of leverage on a firm's risks and returns
C) evaluate the profitability of various sales levels
D) determine the amount of financing needed by the firm
Q:
A firm has fixed operating costs of $10,000, the sale price per unit of its product is $25, and its variable cost per unit is $15. The firm's operating breakeven point in units is ________ and its breakeven point in dollars is ________.
A) 1,000; $6,250
B) 400; $10,000
C) 400; $25,000
D) 1,000; $25,000
Q:
A firm's operating breakeven point is the point at which ________.
A) total operating costs equal total fixed costs
B) total operating costs are zero
C) EBIT is less than sales
D) EBIT is zero
Q:
If a firm's variable costs per unit increase, the firm's ________.
A) financial breakeven point will decrease
B) operating breakeven point will increase
C) sale price per unit will decrease
D) fixed costs per unit will increase
Q:
Breakeven analysis is used by a firm ________.
A) to determine the level of operations necessary to cover all fixed operating costs
B) to determine the least cost of producing goods and services
C) to evaluate the profitability associated with various levels of sales
D) to determine the demand of a product
Q:
A firm's ________ is the level of sales necessary to cover all operating costs, i.e., the point at which EBIT equals zero.
A) cash breakeven point
B) financial breakeven point
C) operating breakeven point
D) total breakeven point
Q:
________ refers to the effects that fixed costs have on the returns that shareholders earn.
A) Purchase power parity
B) Leverage
C) Business risk
D) Pecking order theory
Q:
In capital budgeting, one of the most common scenario approaches is to estimate the NPVs associated with pessimistic (worst), most likely (expected), and optimistic (best) estimates of cash inflow.
Q:
The market rewards firms that adopt a constant dividend payout policy rather than a fixed or increasing level of dividends through higher share prices.
Q:
The level of dividends a firm expects to pay is often directly related to how rapidly it expects to grow and expand its operations.
Q:
Which of the following is true of arguments for dividend relevance?
A) A firm's value is determined solely by the earning power and risk of its assets.
B) Investors are generally risk averse and attach less risk to current dividends than future dividends or capital gains.
C) The value of a firm is unaffected as it functions in a perfect market.
D) A clientele effect exists which causes a firm's shareholders to receive the dividends that they expect.
Q:
The information content of dividends refers to ________.
A) the nonpayment of dividends by corporations
B) dividend changes as indicators of a firm's future
C) a stable and continuous dividend
D) a study of firm's history of dividend payments
Q:
The clientele effect refers to ________.
A) the relevance of dividend policy on a firm's share value
B) a firm's ability to attract stockholders whose dividend preferences are similar to the firm's dividend policy
C) the informational content of dividends that helps in predicting the future earnings and growth of a firm
D) the "bird-in-the-hand" argument
Q:
According to the residual theory of dividends, if a firm's equity need exceeds the amount of retained earnings, the firm would ________.
A) borrow to pay the cash dividend
B) sell additional stock to pay the cash dividend
C) pay no cash dividends
D) pay less dividends
Q:
According to the bird-in-the-hand argument, current dividend payments reduce investor uncertainty and result in a higher value for a firm's stock.
Q:
Due to clientele effect, Modigliani and Miller argue that the shareholders get what they expect and, thus, the value of a firm's stock is unaffected by dividend policy.
Q:
Clientele effect is the argument that a firm attracts shareholders whose preferences with respect to the payment and stability of dividends corresponds to the payment pattern and stability of the firm itself.
Q:
The residual theory of dividends, as espoused by Modigliani and Miller, suggests that dividends represent an earnings residual rather than an active decision variable that affects firm value; this means that a firm's decision to pay dividends or not will not have any impact on a firm's share price.
Q:
In a Dutch auction, ________.
A) a firm offers to repurchase a fixed number of shares, at a discount
B) a firm offers to repurchase a fixed number of shares, at a premium
C) a firm specifies a range of prices at which it is willing to repurchase shares and the quantity of shares that it desires
D) a firm enables stockholders to use dividends received on the firm's stock to acquire additional shares
Q:
The net effect of a stock repurchase is ________.
A) similar to an interest payment
B) similar to a cash dividend
C) similar to a stock split
D) similar to a reverse stock split
Q:
The acceptance of a particular project usually has no impact on a firm's overall risk.
Q:
A corporation is evaluating the relevant cash flows for a capital budgeting decision and must estimate the terminal cash flow. The proposed machine will be disposed of at the end of its usable life of five years at an estimated sale price of $2,000. The machine has an original purchase price of $80,000, installation cost of $20,000, and will be depreciated under the five-year MACRS. Net working capital is expected to decline by $5,000. The firm has a 40 percent tax rate on ordinary income and long-term capital gain. The terminal cash flow is ________.
A) $5,800
B) $7,800
C) $8,200
D) $6,200