Q&A Hero

Q: If a firm sees its EPS increase 27% on a 12% increase in sales, what is the firm's DOL. During the same period the firm saw its EBIT increase only 8%. a. 1.50 b. 3.38 c. 1.34 d. 0.67

Q: Last year Alpine Growers experienced a 34% increase in earnings per share on 11% increase in sales. If management knows that Alpine's DOL is 1.5, what is its DFL? a. 3.09 b. 2.06 c. 3.55 d. 1.67

Q: Archive Storage earned $3.20 a share on sales of $13.6 million. Archive has determined that its degree of operating leverage is 1.87 and its degree of financial leverage is 2.91. If sales are expected to increase 15%, what will be the EPS forecast? a. $2.61 b. $4.60 c. $5.81 d. $3.68

Q: Borkstran has sales of $7.8 million, a variable cost ratio of 0.6, EBIT of $1.1 million, and a degree of combined leverage of 3.4. What is Borkstran's degree of financial leverage? a. 1.20 b. 0.73 c. 2.29 d. 0.84

Q: TCA Cable has fixed operating cost of $2.6 million, and its variable cost ratio is 0.30. TCA has $4.0 in bonds outstanding with a coupon interest rate of 12%. TCA has 1.0 million common shares and 1,000,000 shares of $1.75 preferred stock outstanding. Total revenues for TCA Cable are $14.2 million. If TCA has a marginal tax rate of 40%, what is its degree of combined leverage?a. 2.1b. 1.0c. 1.9d. 2.5

Q: Centex, a producer of telephone systems for small businesses, has current sales of $43 million and variable operating costs of $27.95 million. Centex expects to increase sales in the coming year by 15% while keeping fixed operating costs constant at $9.1 million. What is the DOL for Centex?a. 3.3b. 2.5c. 7.2d. 1.0

Q: Kenzel has an EPS of $4.20 and sales are $9 million. If the firm has a degree of operating leverage of 4.0 and a degree of financial leverage of 5.2, forecast EPS if the firm expects a 4% sales decline. a. $0.71 b. $3.49 c. $4.03 d. $3.33

Q: Weis Products has fixed operating costs of $20 million and a variable cost ratio of 0.55. Weis has 4 million common shares outstanding and a marginal tax rate of 45%. What is Weis's degree of operating leverage at an expected sales level of $150 million. a. 1.00 b. 1.74 c. 1.42 d. 1.32

Q: Kermit's Hardware's (KH) fixed operating costs are $20.8 million and its variable cost ratio is 0.30. The firm has $10 million in bonds outstanding with a coupon interest rate of 9%. KH has 200,000 shares of common stock outstanding. The firm has revenues of $32.2 million and its marginal tax rate is 40%. Compute KH's degree of combined leverage. a. 26.8 b. 5.5 c. 29.1 d. 4.7

Q: Kermit's Hardware's (KH) fixed operating costs are $20.8 million and its variable cost ratio is 0.30. The firm has $10 million in bonds outstanding with a coupon interest rate of 9%. KH has 200,000 shares of common stock outstanding. The firm has revenues of $32.2 million and its marginal tax rate is 40%. Compute KH's degree of financial leverage. a. 1.22 b. 2.07 c. 1.09 d. 1.04

Q: Kermit's Hardware's (KH) fixed operating costs are $20.8 million and its variable cost ratio is 0.30. The firm has $10 million in bonds outstanding with a coupon interest rate of 9%. KH has 200,000 shares of common stock outstanding. The firm has revenues of $32.2 million and its marginal tax rate is 40%. Compute KH's degree of operating leverage. a. 14.81 b. 5.19 c. 12.95 d. 4.54

Q: Last year Avator's operating income (EBIT) increased by 22 percent while its dollar sales increased by 15%. What is Avator's degree of operating leverage (DOL)? a. 0.68 b. 2.0 c. 1.47 d. 0.32

Q: The Lincoln Mint produces various types of one ounce silver commemorative medals for sale to collectors. The cost of producing and selling a given medal is as follows:Fixed costs:Design and preparation of dies$ 8,000Promotion and selling expenses25,000Administrative overhead7,000Total$40,000Variable costs:Silver blanks$6.00Striking medals0.50Mailing expenses3.50Total$ 10.00Projected selling price:$ 14.00What is the degree of operating leverage at an output level of 15,000 units?a. 0.0b. 1.0c. 3.0d. cannot be computed from information given

Q: Suppose that ITC's degree of combined leverage (DCL) is 3.00 at a sales volume of $9 million. Determine ITC's percentage change in earnings per share (EPS) if forecasted sales increase by 20 percent to $10,800,000. a. 60% b. 50% c. 32% d. 18%

Q: Illinois Tool Company's (ITC) fixed operating costs are $1,260,000 and its variable cost ratio (i.e., variable costs as a fraction of sales) is 0.70. The firm has $3,000,000 in bonds outstanding at an interest rate of 8 percent. ITC has 30,000 shares of $5 preferred stock and 150,000 shares of common stock outstanding. ITC is in the 50 percent corporate income tax bracket. Forecasted sales for next year are $9 million. What is ITC's degree of combined leverage at a sales level of $10 million? a. 2.00 b. 1.72 c. 2.50 d. 2.65

Q: Illinois Tool Company's (ITC) fixed operating costs are $1,260,000 and its variable cost ratio (i.e., variable costs as a fraction of sales) is 0.70. The firm has $3,000,000 in bonds outstanding at an interest rate of 8 percent. ITC has 30,000 shares of $5 preferred stock and 150,000 shares of common stock outstanding. ITC is in the 50 percent corporate income tax bracket. Forecasted sales for next year are $9 million. What is ITC's degree of financial leverage at an EBIT level of $1,440,000. a. 1.20 b. 1.875 c. 3.0 d. 1.60

Q: Illinois Tool Company's (ITC) fixed operating costs are $1,260,000 and its variable cost ratio (i.e., variable costs as a fraction of sales) is 0.70. The firm has $3,000,000 in bonds outstanding at an interest rate of 8 percent. ITC has 30,000 shares of $5 preferred stock and 150,000 shares of common stock outstanding. ITC is in the 50 percent corporate income tax bracket. Forecasted sales for next year are $9 million. What is ITC's degree of operating leverage at a sales level of $9 million?a. 1.60b. 1.875c. 3.0d. 3.33

Q: The less a firm's business risk, the ____ the amount of ____ that will be used in the optimal capital structure, holding constant all other relevant factors. a. less; financial leverage b. more; financial leverage c. less; equity capital d. more; debt capital

Q: The increased variability in earnings per share due to the firm's use of debt is a definition of ____. a. combined leverage b. agency risk c. financial risk d. operating risk

Q: The use of fixed-cost financing sources is referred to as the use of a. operating leverage b. a leveraged buyout c. financial leverage d. combined leverage

Q: The use of fixed cost sources of funds, such as debt and preferred stock affect a firm's ____. a. financial risk b. degree of operating leverage c. market power d. business risk

Q: Operating leverage involves the use of a. equity and debt in equal proportions b. market power c. debt d. assets having fixed costs

Q: All of the following factors influence a firm's business risk except: a. degree of operating leverage b. variability of interest rates c. variability of operating costs d. variability of selling prices

Q: The degree of financial leverage is defined as the percentage change in a. EBIT resulting from a given percentage change in sales b. EPS resulting from a given percentage changes in sales c. EBIT resulting from a given percentage change in EPS d. EPS resulting from a given percentage change in EBIT

Q: The use of increasing amounts of combined leverage ____ the risk of financial distress. a. decreases b. increases c. has no effect on d. creates diversity in

Q: A DFL (degree of financial leverage) of 3.0 indicates that a 27% increase in EPS is the result of a ____ increase in EBIT. a. 81% b. 3% c. 9% d. 6%

Q: A negative DOL indicates the percentage ____ in operating losses that occurs as the result of a 1% increase in output. a. increase b. reduction c. change d. None of these are correct.

Q: A firm that has a 2.5 DOL (degree of operating leverage) would find that an 8% increase in EBIT would result from a ____ increase in sales. a. 3.2% b. 5.4% c. 20.0% d. 2.0%

Q: Financial leverage causes a firm's ____ to change at a rate greater than the change in ____. a. EBIT; EPS b. EPS; EBIT c. EBIT; sales d. sales; EBIT

Q: A firm is considering the purchase of assets that will increase its fixed operating costs. The firm should decrease the proportion of ____ it employs in its capital structure if it wants to maintain its existing degree of combined leverage. a. debt b. warrants c. common stock d. none of the above

Q: The degree of combined leverage is equal to the ____ multiplied by the ____. a. degree of operating leverage, variable cost ratio b. degree of financial leverage, variable cost ratio c. degree of operating leverage, degree of financial leverage d. degree of operating leverage, fixed cost ratio

Q: A firm that employs a relatively large proportion of debt and preferred stock in its capital structure will have a relatively ____ degree of financial leverage. a. low b. high c. insignificant d. constant

Q: A firm that employs relatively large amounts of labor- saving equipment in its operations will have a relatively ____ degree of operating leverage. a. low b. constant c. insignificant d. high

Q: Rent, insurance, and the salaries of top management are examples of: a. fixed costs b. capital costs c. variable costs d. fluctuating costs

Q: The degree of combined leverage is equal to the degree of operating leverage ____ the degree of financial leverage. a. added to b. divided by c. multiplied by d. subtracted from

Q: The degree of combined leverage is defined as the percentage change in earnings per share resulting from a given percentage change in a. operating costs b. interest charges c. common stock dividends d. sales (or output)

Q: In the analysis of financial leverage, all of the following are referred to as fixed charges except: a. bond interest b. common stock dividends c. bank interest d. preferred stock dividends

Q: The total variability of the firm's EPS associated with a change in sales is an indication of combined leverage and is best measured by a. DOL b. DFL c. DOL + DFL d. DOL DFL

Q: The percentage change in a firm's EBIT that results in a 1% change in sales or output is known as the a. degree of combined leverage b. degree of financial leverage c. degree of operating leverage d. degree of business risk

Q: When fixed capital costs are incurred by the firm, a change in ____ is magnified into a larger change in earnings per share. a. earnings before interest and taxes b. overhead expenses c. interest charges d. preferred dividends

Q: When fixed operating costs are incurred by the firm, a change in ____ is magnified into a relatively larger change in earnings before interest and taxes. a. overhead expenses b. interest charges c. labor costs d. sales revenue

Q: Raw material and direct labor costs are examples of a. fixed costs b. overhead costs c. variable costs d. capital costs

Q: Why is the cost of internal equity cheaper than the cost of external equity? a. Internal equity is easier to obtain. b. Internal equity does not incur flotation costs. c. Internal equity is deeply discounted. d. Internal equity is tax deductible.

Q: The reason that the cost of internal equity isnot zero is because of the: a. variable costs b. fixed costs c. opportunity costs d. weighted average cost of capital

Q: If last year's dividend was $2.50, the anticipated constant growth rate is 4%, and the selling price of the stock today is $28 per share with flotation costs for the new equity estimated to be 18%, what would be the cost of equity? a. 15.3% b. 13.6% c. 10.9% d. 18.2%

Q: What is the cost of equity for Rolling In Dough Bakeries if dividends are listed below and the price of the stock is $31.50? Flotation costs are 10% of the price. YEAR DIVIDENDS 2005 $3.75 2004 $3.60 2003 $3.45 2002 $3.40 a. 12.8% b. 22.7% c. 15.2% d. 16.6%

Q: Have No Clue Detective Agency is issuing preferred stock which pays a dividend of $6. It is currently selling for $75 and flotation costs are 11% of its price. What is the cost of preferred stock (rounded)? a. 6% b. 18% c. 9% d. 11%

Q: What is the cost of debt for a bond which has a $1,000 face value, costs $842 which is net of flotation costs, has a coupon rate of 6.4% and will mature in 15 years? The firm's tax rate is 35%. a. 4.61% b. 5.38% c. 12.45% d. 10.31%

Q: What is the weighted average cost of capital (rounded) for Night Light Security Services given the following information (the tax rate for Night Light is 30%): Sources Book Value Before Tax Cost of Capital Debt $1,500,000 10% Preferred stock $ 800,000 12% Common stock $3,200,000 18% a. 19% b. 22% c. 28% d. 14%

Q: One major expense associated with issuing new shares of common stock is: a. variable costs b. fixed costs c. operation costs d. flotation costs

Q: Flipping Your Wig Toupee Company has determined the following information: Source of Capital Book Value After-tax Cost Long-term debt $700,000 5.3% Preferred stock $ 50,000 12.0% Common stock $650,000 16.0% What is the company's weighted average cost of capital (rounded)? a. 10.5% b. 20.6% c. 15.2% d. 18.1%

Q: Mahlo is planing to diversify into the bakery industry. As a result, its beta should drop from 1.4 to 1.2 and the expected long-term growth rate of dividends will drop from 12% to 9%. The risk-free rate is 4%, the expected market risk premium is 9%, and the current dividend per share paid by Mahlo is $2.10. Should Mahlo complete the diversification into the bakery industry?a. No, stock price drops about $11.70b. Yes, stock price increases about $9.40c. Yes, stock price increases about $1.80d. No, stock price drops about $9.40

Q: Bay State Technology has determined that its cost of equity is 15% and its after-tax cost of debt is 7.2%. Bay State expects to earn $14 million after taxes next year and, as a new firm, does not pay any dividends. The stock sells for $24. Bonds are currently selling at par value. Compute Bay State's weighted cost of capital. A partial balance sheet is shown below:Current liabilities$ 300,000Long-term debt1,000,000Common stock at $1 par100,000Paid in capital900,000Retained earnings3,000,000Total liabilities and stockholders' equity$5,300,000a. 13.4%b. 13.1%c. 11.6%d. 12.7%

Q: Heleveton Industries is 100% equity financed. Its current beta is 1.1. The expected market risk premium is 8.5% and the risk-free rate is 4.2%. If Heleveton changes its capital structure to 25% debt, it estimates its beta will increase to 1.2. If the after-tax cost of debt will be 6%, should Heleveton make the capital structure change? a. Yes, cost of capital decreases by 2.52% b. Yes, cost of capital decreases 1.67%. c. No, stock price would decrease due to increased risk d. No, cost of capital increases by 0.85%.

Q: Columbia Gas Company's(CG) current capital structure is 35% debt and 65% equity. This year CG has earnings after tax of $5.31 million and is paying $1.6 million in dividends. To finance a transmission pipe line, CG can borrow $2 million at a cost of 10%, the same rate that CG is currently paying on a total of $15 million long-term debt. CG has 1,000,000 shares outstanding and its current market price is $31. If CG's long-term growth rate of dividends is expected to be 8%, what is the weighted cost of capital for the firm? Assume a marginal tax rate of 40%. a. 10.9% b. 13.6% c. 19.6% d. 16.9%

Q: California Best (CB), a sport shoe store, expects an operating income of $2.3 million this year. CB has no long-term debt. The firm is considering as expansion project. The current risk-free rate of return is 7% and the current market risk premium is 8.3%. If CB's beta is 20% greater than the overall market, what is the firm's cost of capital? Assume that CB has a marginal tax rate of 40%. a. 8.3% b. 16.96% c. 9.96% d. 15.3%

Q: Wright Express(WE) has a capital structure of 30% debt and 70% equity. WE is considering a project that requires an investment of $2.6 million. To finance this project, WE plans to issue 10-year bonds with a coupon interest rate of 12%. Each of these bonds has a $1,000 face value and will be sold to net WE $980. If the current risk-free rate is 7% and the expected market return is 14.5%, what is the weighted cost of capital for WE? Assume WE has a beta of 1.20 and a marginal tax rate of 40%. a. 14.9% b. 12.4% c. 13.4% d. 16.0%

Q: American Dental Laser is selling a 10 year $1,000 face value bond with a 8% coupon rate. Interest is paid annually. The price to the public is $820 and the issue costs per bond are $10 each. Compute the pretax cost of debt for these bonds. a. 11.1% b. 11.3% c. 11.5% d. 11.8%

Q: Temple Company's common stock dividends have grown over the past 5-year period from $0.60 per share to $0.89 (today). Assume that Temple's dividends are expected to grow at this rate for the foreseeable future. Temple's stock is currently selling for $12 per share. New common stock can be sold to net the company $11 per share. Determine the costs of internaland externalequity to Temple.a. 18.1%; 18.9%b. 15.9%; 16.6%c. 16.2%; 16.9%d. cannot be computed

Q: Haulsee Inc. pays no dividend currently but is expected to start paying a small dividend next year. The 5-year old firm has a beta of 1.25 and current earnings of $0.90 per share. The current Treasury bill rate is 6.10% and the market risk premium is 8.8%. Determine Haulsee's cost of equity if the firm's tax rate is 40%. a. 9.48% b. 17.1% c. 14.9% d. cannot determine from the information provided

Q: Pluega Inc. issued a $100 million 8.27% coupon debenture bond due in the next 20 years. The bonds each sold for $996. If the bonds pay interest semi-annually, what is Pluega's after cash cost of debt? Assume 40% tax rate.a. 4.96%b. 8.30%c. 4.99%d. 3.32%

Q: Witin's stock price is currently $34.25 and the current quarterly dividend is $0.25. Consensus estimates for Witin indicate a growth rate in earnings of 10% into the foreseeable future. If Witin plans to sell 1 million shares to raise new capital for expansion, what is the cost of new equity if the issuance costs are 8%? a. 13.49% b. 10.87% c. 13.21% d. 13.17%

Q: Groves, Inc. pays an annual dividend of $1.22. This dividend is expected to continue growing at a rate of about 5 percent each year. The firm is in a fairly risky business and has a beta of 1.45. The expected market rate of return is 13.5 percent, and the risk-free rate is 9.3 percent. What is the cost of equity for Groves? a. 19.6% b. 13.5% c. 15.4% d. 6.1%

Q: Alpha Products maintains a capital structure of 40 percent debt and 60 percent common equity. To finance its capital budget for next year, the firm will sell $50 million of 11 percent debentures at par and finance the balance of its $125 million capital budget with retained earnings. Next year Alpha expects net income to grow 7 percent to $140 million, and dividends also are expected to increase 7 percent to $1.40 per share and to continue growing at that rate for the foreseeable future. The current market value of Alpha's stock is $30. If the firm has a marginal tax rate of 40 percent, what is its weighted cost of capital for the coming year? a. 9.64% b. 8.63% c. 9.84% d. 16.4%

Q: Easy Slider recently sold a 15 year $1,000 face value bond at a discount for $700 that net the firm $692 after flotation costs. The low coupon bond has a 6% coupon with interest paid semiannually. If Easy Slider has a marginal tax rate of 40 percent, what is its after-tax cost of debt for these bonds? a. 10.0% b. 6.0% c. 9.2% d. 7.8%

Q: Easy Rider Inc. sold a 15 year $1,000 face value bond with a 10 percent coupon rate. Interest is paid annually. After flotation costs, Easy Rider received $928 per bond. Compute the after-tax cost of debt for these bonds if the firm's marginal tax rate is 40 percent. a. 6.0% b. 7.2% c. 7.8% d. 6.6%

Q: A firm with a 40 percent marginal tax rate has a capital structure of $60,000,000 in debt and $140,000,000 in equity. What is the firm's weighted cost of capital if the marginal pretax cost of debt is 12 percent, the firm's average pretax cost of debt outstanding is 8%, and the cost of equity is 14.5 percent? a. 13.75% b. 11.59% c. 12.31% d. 14.29%

Q: Northeast Airlines (NA) has a current dividend of $1.80. Dividends are expected to grow at a rate of 7 percent a year into the foreseeable future. What is NA's cost of external equity if its stock can be sold to net $46 a share? a. 10.9% b. 11.2% c. 7.2% d. 3.9%

Q: According to Value Line, Bestway has a beta of 1.15. If 3-month Treasury bills currently yield 7.9 percent and the market risk premium is estimated to be 8.3 percent, what is Bestway's cost of equity capital? a. 17.45% b. 8.36% c. 9.55% d. 9.09%

Q: What is the cost of equity for East Roon, if the firm is expected to always pay a constant dividend of $2.22? The firm's common stock is presently selling for $18.50. a. 8.3% b. 12.0% c. 10.2% d. cannot be determined from the information given

Q: Determine the weighted cost of capital for the Mills Company that will finance its optimal capital budget with $120 million of long-term debt (kd= 12.5%) and $180 million in retained earnings (ke= 16.0%). Mills' present capital structure is considered optimal. The company's marginal tax rate is 40%. (Compute answer to nearest .1%). a. 14.3% b. 12.6% c. 14.6% d. 7.1%

Q: The following financial information is available on Rawls Manufacturing Company:Current per share market price$48.00Current per share dividend$ 3.50Current per share earnings$ 6.00Beta1.1Expected rate of return on market12.0%Risk-free rate6.0%Expected long-term growth rate5.0%Rawls can issue new common stock to net the company $44 per share. Determine the cost of external equity capital using the dividend capitalization model approach. (Compute answer to the nearest 0.1%).a. 12.7%b. 14.4%c. 12.6%d. 13.4%

Q: The following financial information is available on Rawls Manufacturing Company:Current per share market price$48.00Beta1.1Expected rate of return on market12.0%Risk-free rate6.0%Rawls can issue new common stock to net the company $44 per share. Determine the cost of internal equity capital using the capital asset pricing model approach. (Compute answer to the nearest 0.1%).a. 12.9%b. 12.6%c. 13.0%d. 4.4%

Q: The following financial information is available on Rawls Manufacturing Company:Current per share market price$48.00Current (t = 0) per share dividend$3.50Expected long-term growth rate5.0%Rawls can issue new common stock to net the company $44 per share. Determine the cost of internal equity capital using the dividend capitalization model approach. (Compute answer to the nearest 0.1%).a. 12.3%b. 13.4%c. 13.0%d. 12.7%

Q: The Allegheny Valley Power Company common stock has a beta of 0.80. If the current risk-free rate is 6.5% and the expected return on the stock market as a whole is 16%, determine the cost of equity capital for the firm (using the CAPM). a. 14.1% b. 7.6% c. 6.5% d. 2.4%

Q: Calculate the after-tax cost of preferred stock for Ohio Valley Power Company, which is planning to sell $100 million of $3.25 cumulative preferred stock to the public at a price of $25 per share. Flotation costs are $1.00 per share. Ohio Valley has a marginal income tax rate of 40%. a. 13.0% b. 7.8% c. 8.12% d. 13.54%

Q: Determine the (after-tax) percentage cost of a $50 million debt issue that the Mattingly Corporation is planning to place privately with a large insurance company. Assume that the company has a 40% marginal tax rate. This long-term debt issue will yield 12% to the insurance company. a. 4.8% b. 7.2% c. 12.0% d. 15%

Q: Retained earnings are a cheaper source of funds than the sale of new equity because a. retention defers the payment of taxable dividends to shareholders b. there are no flotation costs c. new shares are usually priced below current market price d. all the above

Q: The cost of external equity is greater than the cost of internal equity because a. it decreases the earnings per share b. it increases the market price of the stock c. of the flotation costs d. dividends are increased

Q: The historic beta of a firm is of little use as a forecast of the firm's future systematic risk characteristics when a. the firm is growing at a rate of 7-10 percent a year b. the firm is expanding an existing product line c. the firm is expanding into a new product line d. all of these answers are correct