2. The extent to which fixed costs are used in a firm's operations is called its:
a) Financial leverage b) Operating leverage c) Total leverage d) Foreign risk exposure
3. As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected EPS. a) True b) False
4. In general, an increase in the corporate tax rate would cause firms to use less debt in their capital structures. a) True b) False
5. Suppose you know that your firm is facing relatively poor prospects but needs new capital. If you also know that investors do not have this information, signaling theory would predict that you would:
a) Issue debt to maintain the returns of equity holders.
b) Issue equity to share the burden of decreased equity returns between old and new shareholders.
c) Both A and B
6. The ability to borrow money at a reasonable cost when good investment opportunities arise is called:
a) Symmetric information b) Asymmetric information (c) Capital structure d) Reserve borrowing capacity
7. Texas Products Inc. has a division that makes plastic composite bags for the space industry. The division has fixed costs of $45,000 per month, and it expects to sell 45,000 bags per month. If the variable cost per bag is $6.00, what price must the division charge in order to break even?
a) $6.00 b) $7.00 c) $8.00 d) $9.00
8. Chip Motors has $20 million in assets, which are financed with $4 million of debt and $16 million of equity. If Chip's beta is currently 2.4 and its tax rate is 40 percent, what is its unlevered beta?
a) 1.503 b) 1.934 c) 2.087 d) 2.400
9. The Free Indeed Company manufactures ladies shoes that are sold through discount houses. The shoes are sold for $20 each pair; the fixed costs are $110,000 for up to 30,000 pairs of shoes; variable costs are $13 per pair of shoes. What is the firm's breakeven point in units sold?
a) 30,000 pairs of shoes b) 15,714 pairs of shoes c) 8,462 pairs of shoes d) 5,500 pairs of shoes
10. The term "capital structure" refers to:
a) Long-term debt, preferred stock, and common stock equity. b) Current asset and current liabilities
c) Total assets minus liabilities d) Shareholders' equity
11. When sequential long-term financing is involved, the choice of debt or equity influences the future financial ------------------- of the firm.
a) Timing b) Flexibility c) Liquidity d) Solidarity
12. The traditional approach towards the valuation of a company assumes:
a) That the overall capitalization rate holds constant with changes in financial leverage.
b) That there is an optimum capital structure.
c) That total risk is not altered by changes in the capital structure.
d) That markets are perfect.
13. The cost of monitoring management is considered to be a (an):
a) Bankruptcy cost. b) Transaction cost. c) Agency cost d) Institutional cost
14. The cost of capital for a firm, when we allow for taxes, bankruptcy, and agency costs:
a. Remains constant with increasing levels of financial leverage.
b. First declines and then ultimately rises with increasing levels of financial leverage.
c. Increases with increasing levels of financial leverage.
d. Decreases with increasing levels of financial leverage.
15. The amount of stock that can be sold by a corporation without shareholder approval is limited to the number of: a) preferred shares b) Treasury shares c) Undistributed shares d) None of the above
The mix of debt, preferred stocks and common equity are given. The fixed costs are analyzed.