01 Jan A. Variable leverage

Part 1 of 1 – 95.0/ 100.0 Points

Question 1 of 20

5.0/ 5.0 Points

The initial decision of what products and services to produce has a much __________ on the profitability of the firm when compared to the __________.

A. smaller impact; financing decision

B. larger impact; dividend decision

C. larger impact; investment decision

D. larger impact; financing decision

Question 2 of 20

5.0/ 5.0 Points

You have a project that costs $800,000. It has a 1/3 chance of paying off $3,000,000 and a 2/3 chance of paying off $0. What is the expected profit from the new project?

A. $300,000

B. $200,000

C. $100,000

D. Zero

Question 3 of 20

5.0/ 5.0 Points

Financial leverage is the degree to which a firm or individual utilizes:

A. borrowed money to pay wages.

B. borrowed money to pay dividends.

C. borrowed money to magnify equity earnings.

D. borrowed money to diminish equity earnings.

Question 4 of 20

5.0/ 5.0 Points

Which of the statements below is FALSE?

A. Two different individuals or companies could go to the same bank and request exactly the same amount of funding for their projects and yet could be required to pay different costs for their funds.

B. It is important to remember that a public company is a separate entity and in that capacity can borrow from bondholders, preferred stockholders, and common shareholders, but not from banks.

C. Lenders, regardless of their classification, all consider their funds as investments, for which they hope to make a positive return.

D. The return to the investor is the cost to the seller.

Question 5 of 20

5.0/ 5.0 Points

__________ is the point at which the equity value of the firm is zero.

A. The optimal capital structure

B. Bankruptcy

C. The optimal tax structure

D. None of the above

Question 6 of 20

5.0/ 5.0 Points

Information is asymmetric when one party in a transaction has a different set of __________ than the other party in the transaction.

A. asymmetries

B. information

C. hypotheses

D. earnings

Question 7 of 20

5.0/ 5.0 Points

The process of borrowing money from others to make money on your idea is commonly known in the investment world as:

A. “losing other people’s money”.

B. “using other people’s money”.

C. “abusing other people’s money”.

D. “misusing other people’s money”.

Question 8 of 20

5.0/ 5.0 Points

Moving from one source of funding to another in a particular order is called the:

A. Pecking Order Hypothesis.

B. Barnyard Order Hypothesis.

C. Funding Order Hypothesis.

D. Capital Market Hypothesis.

Question 9 of 20

5.0/ 5.0 Points

If earnings reflect a return greater than the cost of debt, then:

A. the more debt the company has sold, the worse off the shareholders are.

B. the less debt the company has sold, the better off the shareholders are.

C. the more debt the company has sold, the better off the shareholders are.

D. the more debt the company has bought, the better off the shareholders are.

Question 10 of 20

5.0/ 5.0 Points

The federal government bond market is open only to:

A. state government agencies.

B. local government agencies.

C. the federal government.

D. municipal government.

Question 11 of 20

5.0/ 5.0 Points

Capital structure refers to how the firm finances its operations and growth through a combination of:

A. equity types.

B. security types.

C. types of earnings.

D. types of debt.

Question 12 of 20

5.0/ 5.0 Points

__________ means that managers or owners of a company know more about the future performance of the company than potential outside lenders.

A. Symmetric information

B. External financing

C. Asymmetric information

D. Two-sided information

Question 13 of 20

5.0/ 5.0 Points

Which of the statements below is FALSE?

A. The “riskier” borrower will most likely have to pay a lower cost for funds.

B. In the bond market, we see different rates as the different yields on bonds for different companies.

C. In the equity market, we see different rates as the different required returns for companies due to their different betas.

D. In general, the cost of funds for an individual or company will be directly related to the lender’s view of the risk of repayment of the funds.

Question 14 of 20

5.0/ 5.0 Points

__________ capital structure refers to a combination of debt and equity that maximizes the value of the firm.

A. An optimal

B. An irrelevant

C. A perfect

D. A minimal

Question 15 of 20

5.0/ 5.0 Points

At the optimal debt-to-equity ratio, the cost of capital (WACC) is __________ for the firm. This point reflects the maximum benefit of leverage.

A. the lowest

B. the highest

C. at the midpoint

D. irrelevant

Question 16 of 20

5.0/ 5.0 Points

One way of measuring the advantage of financial leverage to the owners of the company is:

A. to examine the earnings per share (EPS) of a company before borrowing from debt lenders.

B. to examine the earnings per share (EPS) of a company after borrowing from debt lenders.

C. to examine the dividends per share (DPS) of a company before and after borrowing from debt lenders.

D. to examine the earnings per share (EPS) of a company before and after borrowing from debt lenders.

Question 17 of 20

5.0/ 5.0 Points

Fresh out of Harvard Business School, Joe Walker, the new CFO of Joe’s Southern Cornbread Company, wants to shake things up at the sleepy little food company headquartered in Birmingham, Alabama. The firm is currently an all-equity firm because “that’s the way we’ve always done it.” Under pressure from a new group of major stockholders, however, Walker is considering acquiring some debt (leverage) in an effort to boost earnings per share. The company currently has 600 shares, but he is thinking about borrowing $6,000 at 10% per year and buying back 200 of those shares. Refer to the scenario above. What level of EBIT would make this an attractive strategy?

A. $2,000

B. $1,800

C. $1,600

D. $1,400

Question 18 of 20

0.0/ 5.0 Points

To say that the investing decision and financing decision of a firm are separable is to say:

A. that firms first select what products or services they will produce and then select how best to finance these products or services.

B. that firms first select how best to finance products or services and then select what products or services they will produce.

C. that firms first select what services they want and then what products they will produce.

D. that firms first select what products they will produce and then what services they want.

Question 19 of 20

5.0/ 5.0 Points

Fresh out of Harvard Business School, Joe Walker, the new CFO of Joe’s Southern Cornbread Company, wants to shake things up at the sleepy little food company headquartered in Birmingham, Alabama. The firm is currently an all-equity firm because “that’s the way we’ve always done it.” Under pressure from a new group of major stockholders, however, Walker is considering acquiring some debt (leverage) in an effort to boost earnings per share. The company currently has 600 shares, but he is thinking about borrowing $6,000 at 10% per year and buying back 200 of those shares. Refer to the scenario above. What would the unleveraged and leveraged EPSs look like if EBIT were only $1,200?

A. All-equity EPS = $2.00, leveraged-equity EPS = $1.50

B. All-equity EPS = $3.00, leveraged-equity EPS = $2.00

C. All-equity EPS = $2.00, leveraged-equity EPS = $3.00

D. All-equity EPS = $4.50, leveraged-equity EPS = $3.00

Question 20 of 20

5.0/ 5.0 Points

__________ is the degree to which a firm or individual utilizes borrowed money to make money.

A. Variable leverage

B. Fixed leverage

C. Operating leverage

D. Financial leverage