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Exam 15: Capital Structure Decisions

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Question 41

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Sunflower Company sells its product for $4 per unit. The variable cost per unit is $1 and the fixed operating costs are $500. What is the degree of operating leverage at 5,000 units produced and sold at Sunflower Company? What does this mean?

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Degree of operating leverage = 1.034, Th...

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Question 42

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Green Company's contribution margin of $5 per unit and fixed operating costs of $45,000 breaks even, in terms of operating earnings, at:

A) 5,000 units.
B) 9,000 units.
C) 45,000 units.
D) 225,000 units.

E) A) and B)
F) All of the above

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Question 43

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The local golf range sells its product for $9 per unit. The variable cost per unit is $2 and the fixed operating costs are $3,000. The degree of operating leverage at 20,000 units produced and sold is closest to:

Which of the following is not one of the scenarios that the Modigliani and Miller Theories comprise?

The uncertainty arising from the mix of fixed and variable costs in the production and sale of goods is best described as:

Trinity, Inc. has an Altman's Z-score of 3.50. Westlake, Inc. has an Altman's Z-score of 2.15. Trinity, Inc. is more likely to go bankrupt.

The conflict of interest between creditors and shareholders when a company is in financial distress is an example of agency issues.

Which of the following is not an assumption of Modigliani and Miller irrelevance theory?

The uncertainty regarding the price and quantity of goods a company will produce and sell is best described as:

Altman Z-score is used to predict the likelihood of bankruptcy.

The Fireworks Company sells packs of sparklers for $2.00 each. It costs $.50 per pack to manufacture and distribute the sparklers. The Fireworks Company has fixed operating costs of $8,000 and fixed financing costs of $2,000. What is the Fireworks Company's degree of total leverage at 25,000 packs of sparklers produced and sold? What does this mean?

The Gearing Company with a degree of operating leverage of 1.5 and a degree of total leverage of 4.2 has a degree of financial leverage closest to:

Financial risk is defined as uncertainty regarding operating earnings based on the mix of fixed and variable operating costs.

Consider the following information for the AppleTree Company: The times interest earned for AppleTree is closest to:

According to the Modigliani and Miller capital structure theory, in a world with interest deductibility but no costs to financial distress,

A company experiences a 60 percent change in net income for every 10 percent change in operating profit. What is this company's degree of financial leverage?

The use of debt normally increases the expected ROE.

List at least three factors that affect a company's capital structure.

The correct order in which companies prefer to raise financing according to pecking order theory is:

Debt is almost always the most expensive form of capital.