Capital Structure and Leverage

What is the term for the mix of debt, preferred stock, and common equity that a firm uses to finance its assets?

According to the text, which risk is considered the single most important determinant of a firm's capital structure?

What is the term for the additional risk placed on common stockholders as a result of a firm's decision to finance with debt?

A firm has a relatively small amount of fixed costs amounting to $25,000, variable costs of $1.50 per unit, and sells its product for $2.00 per unit. What is the firm's operating break-even point in units?

What is the primary effect of a firm increasing its financial leverage on its expected earnings per share (EPS) and its risk?

The capital structure that maximizes a firm's stock price is also the one that:

Barnes Co. has a capital structure of 40 percent debt and 60 percent equity, a tax rate of 40 percent, and a levered beta (bL) of 1.4. What is the company's unlevered beta (bU)?

Under the Modigliani-Miller (MM) theory with corporate taxes, but no personal taxes or bankruptcy costs, what is the optimal capital structure for a firm?

Which capital structure theory suggests that firms balance the tax benefits of debt against the problems caused by potential bankruptcy?

According to the signaling theory of capital structure, what does the announcement of a new stock offering by a mature firm generally suggest to investors?

What is the term for the ability to borrow money at a reasonable cost when good investment opportunities arise, which firms often maintain by using less debt in normal times?

What does the pecking order hypothesis suggest is the last resort for a firm when raising capital?

The 'windows of opportunity' concept in capital structure suggests that managers might issue new equity primarily when:

Which of the following factors would likely encourage a firm to use a higher percentage of debt in its capital structure?

What is a firm's operating break-even point?

Which of the following is NOT a primary factor affecting a firm's business risk?

If a firm increases its use of debt, what is the conceptual impact on the cost of equity (rs)?

Hartman Motors has an unlevered beta (bU) of 1.3, a tax rate of 35 percent, and is considering a capital structure with a debt-to-equity ratio (D/E) of 0.5. Using the Hamada equation, what would be Hartman's new levered beta (bL)?

What is the primary reason that the capital structure that maximizes expected EPS is generally not the optimal capital structure?

What is the term used to describe the situation where managers have better information about a firm's prospects than outside investors?

In the context of capital structure, which of the following is an example of an operating economy that can create synergy in a merger?

What is the primary difference between a firm's business risk and its financial risk?

If a firm has a high percentage of fixed costs in its operations, it is said to have a high degree of what?

A firm has total invested capital of $200,000, which is financed with 50 percent debt and 50 percent equity. Its expected EBIT is $30,000, the interest rate on its debt is 7.2 percent, and its tax rate is 40 percent. What is the firm's expected Return on Equity (ROE)?

Which statement best describes the relationship between the weights used in the WACC calculation and a firm's capital structure?

Bigbee Electronics has an unlevered beta of 1.0, the risk-free rate is 3 percent, and the market risk premium is 6 percent. If the firm adopts a capital structure with a debt-to-capital ratio of 40 percent (D/E ratio of 0.6667) and a tax rate of 40 percent, what is its estimated cost of equity?

In the trade-off theory of capital structure, what happens to the firm's stock price as it increases its debt ratio beyond the optimal point (D2 in Figure 14.8)?

What is meant by the term 'net debt'?

A firm has a choice between two production plans. Plan A has fixed costs of $25,000 and Plan B has fixed costs of $70,000. Which statement is correct regarding the operating leverage and business risk of these two plans?

Terrell Trucking Company has projected the following stock prices at different debt-to-capital ratios: 20 percent debt gives a price of $34.25; 30 percent gives $36.00; 40 percent gives $35.50; and 50 percent gives $34.00. What is Terrell's optimal capital structure?

Which of the following is NOT one of the six assumptions of the original Modigliani-Miller (MM) irrelevance theory?

A firm's Return on Invested Capital (ROIC) is defined as:

Why might a very profitable firm like Google choose to use relatively little debt in its financing?

How can the use of debt financing help to discipline managers and reduce agency costs?

For the Bigbee Electronics example with 50 percent debt, the expected ROE is 13.68 percent, but the ROE if demand is 'terrible' is -46.32 percent. What does this wide range of outcomes indicate?

What is the primary reason that firms' actual capital structures can change over time due to 'market actions'?

Which of the following industries would be expected to use a relatively high percentage of debt in their capital structure?

What is meant by the term 'financial leverage'?

In the Modigliani-Miller framework, what is the impact of introducing personal taxes on stock income and debt income on the optimal capital structure decision?

Why do analysts and rating agencies look at the times-interest-earned (TIE) ratio when assessing a firm's financial leverage?

A firm has an operating break-even point of 70,000 units. If it sells 100,000 units, will its EBIT be positive, negative, or zero?

Which of the following is considered an 'investor-supplied' fund when defining a firm's capital?

According to the text, a firm's choice of how much leverage to use is like putting a dagger in a car's steering wheel because:

If a firm's actual debt ratio is significantly above its target range, what action is it most likely to take for new financing?

What is the primary reason that changes in capital structure have no effect on a firm's Return on Invested Capital (ROIC)?

Which of the following is a key determinant of a firm's operating leverage?

In the context of the trade-off theory shown in Figure 14.8, what does the 'Value Added by Debt Tax Shelter Benefits' represent?

Which theory of capital structure best explains why a firm with very favorable, secret prospects would prefer to finance a new project with debt rather than new equity?

Firm HL has a debt-to-capital ratio of 50 percent and an interest rate of 12 percent. Firm LL has a debt-to-capital ratio of 30 percent and an interest rate of 10 percent. Both firms have $20 million in invested capital and $4 million of EBIT, and a 40 percent tax rate. What is Firm HL's Return on Equity (ROE)?

What does it mean for a firm's capital structure to have 'target' weights?