HB 311 Quiz 11

The central issue in the study of leverage is: a. whether leverage affects stock price. b. whether an optimal capital structure exists that maximizes stock price. c. whether an optimal capital structure exists that minimizes the cost of capital. d. All of the above

d

. The difference between fixed and variable costs is that: a. variable costs move up and down with changes in sales while fixed costs remain constant. b. variable costs are only found in factory operations while fixed costs occur only in expenses. c. fixed costs are the costs of fixed assets, everything else is a variable cost. d. Both a and b

a

EBIT, earnings before interest and taxes, is also called: a. operating income. b. net income. c. financial income. d. revenue.

a

Financial leverage may benefit shareholders when the: a. return on capital employed is greater than the after tax cost of debt. b. return on equity is greater than the cost of debt. c. return on investments is less than the cost of capital. d. None of the above

a

Financial leverage increases a firm's ROE and EPS under which of the following circumstances? a. ROCE = cost of debt b. ROCE > after tax cost of debt c. ROCE < pretax cost of debt d. ROCE = cost of equity

b

The degree of financial leverage is measured by relating the percentage change in earnings per share to the percentage change in: a. sales. b. EBIT. c. debt ratio. d. share price.

b

Which of the following is an overall measure of business performance? a. Interest coverage ratio b. ROE c. Debt to equity ratio d. Revenue

b

Financial leverage is a direct function of the ratio of: a. net income to sales. b. EBIT to sales. c. interest expense to EBIT. d. net income to the number of shares of common stock.

c

The underlying reason that leverage may increase stock price is that under certain conditions: a. it increases risk, which in turn requires a larger return on equity. b. it improves performance measured in terms of EBIT and EPS. c. it improves performance measured in terms of ROE and EPS. d. it is cheaper to raise new debt than it is to raise new equity.

c

Financial leverage has the following effect on financial performance: a. during periods of reasonably good performance, leverage enhances results in terms of ROE and EPS. b. leverage adds variability to financial performance making the firm's stock a riskier investment. c. leverage always makes performance better and thereby increases stock price. d. Both a and b

d