Chap 13 study quiz

______ analysis is a key to understanding operating leverage.

Breakeven

______ _______is the mixture of sources of funds (debt, preferred stock and common stock) that a firm uses to finance assets.

Capital structure

_________ leverage is the additional volatility of net income caused by the presence of fixed costs associated with having debt in the capital structure.

Financial

_______ in projects may change a firm's fixed operating and financing costs, thereby affecting the firm value.

Investments

Changes in financial leverage bring the potential for good and ______ results.

bad

Every time a company ______, it increases its financial leverage and financial risk.

borrows

A sales _________ chart shows graphically how fixed costs, variable costs, and sales revenue interact.

breakeven

The risk associated with operating leverage is ______ risk.

business

Debt is less risky because bondholders have a ______ superior to that of common stockholders on the earnings and assets of the firm.

claim

The total effect of operating and financial leverage is called ______ leverage.

combined

The financing sources (debt, preferred and common stock) that make up a firm's capital structure all have different ______ and degrees of riskiness.

costs

New equity financing ______ financial leverage and risk.

decreases

The ______ of financial leverage is the percentage change in net income divided by the percentage change in EBIT.

degree

The risk associated with financial leverage is _______ risk.

financial

_________ costs are those costs that do not vary with the company's level of production.

fixed

Firms that have higher proportions of debt in their capital structure will have _______financial leverage.

greater

Although debt is cheaper than equity, too much debt will ______ the WACC because it will increase the firm's financial risk.

increase

Higher leverage is helpful when sales _______, because it magnifies the positive change.

increase

One of the primary advantages of using debt financing (for companies eligible under the TCJA) is the tax deductibility of _______.

interest

If fixed operating costs and fixed interest cost were both zero, there would be no ______ effect.

leverage

When a firm uses debt to finance its assets this creates ______.

leverage

A _______ _______ is when one firm buys out another using a large amount of borrowed money.

leveraged buyout

Debt capital has a ______ cost than equity capital.

lower

Financial managers use capital structure theory to help determine the mix of debt and equity that ______ the weighted average cost of capital.

minimizes

A measure of the magnitude of the effect of fixed costs on operating income is the degree of ______ leverage.

operating

Fixed ______ costs create operating leverage, fixed financial costs create financial leverage, and these two types of leverage together form combined leverage.

operating

Financial managers must balance the costs and benefits of debt and use expertise and experience to develop the capital structure they deem ______.

optimal

Firms seek to balance the costs and benefits of debt to reach an ______ mix in their capital structure that maximizes the value of the firm.

optimal

A company with high fixed operating costs must generate high sales ______ to reach the sales breakeven pinpoint.

revenue

The presence of debt in a company's capital structure and the accompanying interest cost create extra ______ for the firm.

risk

Debt financing is cheaper than equity financing for two reasons, the tax deductibility of interest and because debt is less _____.

risky

In breakeven analysis, the ______ breakeven point is the level of sales that a firm must reach to cover its operating costs.

sales

The total degree of business risk that a company faces is a function of both ______ volatility and the degree of operating leverage.

sales

Fixed costs may affect a firm's _______ because of leverage effects and the resulting risk from those leverage effects.

value

Costs that change as the company's production levels change are called _____costs.

variable

Modigliani and Miller suggested that if debt costs did not increase with additional borrowing, the tax deductibility benefit would imply that firms should finance with __________ debt.

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