1. In theory, the firm should maintain financial leverage consistant with a capi
ID: 2631402 • Letter: 1
Question
1. In theory, the firm should maintain financial leverage consistant with a capital structure that?
A. Maximizes dividends
B. Meets the industry standard
C. Maximizes the earnings per share
D. Maximizes the owner's wealth
2.probability of bankruptcy is determined by
a. Business risk
b. interest rate risk
c. total risk
d. Financial risk
3.Poor capital structure decisions can result in__ the cost of capital, resulting in__ acceptable investments
a. Decreasing; more
b. increasing; fewer
c. Increasing; more
d. decreasing; fewer
4. The ___approach to capital structure proposed that an optimal capital structure be selected which__
a. M and M; maximizes the weighted average cost of capital
b. residual theory; minimizes dividends
c. EBIT-EPS;maximizes the EPS
d. Traditional;minimizes the cost of debt
5.The change in net working capital when evaluating a capital budgeting decision is__
a. The change in fixes liabilities minus the change in fixed assets
b. The change in current assets minus the change in current liabilities
c. The increase in current liabilities
d. The increase in current assets
6.which of the following must be considered in computing the terminal value of a replacement project?
a. operating cash flow for the final year
b. Before-tax proceeds from the sale of a new asset
c. Before- tax proceeds from the sale of an old asset
d. After-tax proceeds from the sale of a new asset
7.Canvas Reproductions has fixed operating costs of $12,800 and variable operating costs of $14.52 per unit and sells its paintings for $27.05 each. At what level of unit sales will the company break even in terms of EBIT?
8.which of the following is true of leverage?
A. it includes the effect of operating fixed costs on the returns of shareholders and not the financial fixed costs.
b. it is used to evaluatre the profitability associated with the various levels of sales
c. It refers to the effects that operating and financial fixed costs have on the returns that shareholders earn.
d. It is associated with risks which are out of the control of managers.
9.___ is the potential use of fixed operating costs to magnify the effects of changes in sales on earnings before interest and taxes
a. operating leverage
b. operating budget
c.Financial leverage
d.Ratio Analysis
10. Financial leverage measures the effect of fixed financial costs on relationship between___
a. sales and EBIT
b. EBIT and EPS
c. Sales and EPS
d. EBIT and preference dividend
Explanation / Answer
1 C. Maximizes the earnings per share
2 d. financial risk
3 d. decreasing; fewer
4 c. EBIT-EPS;maximizes the EPS
5 b. The change in current assets minus the change in current liabilities
6 b. Before- tax proceeds from the sale of a new asset
7 Breakeven = FC/ (p - VC) = 12800/(27.05 - 14.52) = 1021.5 = 1021
8 c It refers to the effects that operating and financial fixed costs have on the returns that shareholders earn
9 a. operating leverage
10 b EBIT and EPS
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