FIN 380 Chapter Notes - Chapter 16: Operating Leverage, Tax Shield, Pecking Order

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sapphiregnat826

1 Apr 2017

School

Quinnipiac University

Department

Finance

Course

FIN 380

Professor

Mancini

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Document Summary

Capital structure - the manner in which a firm"s assets are financed; that is, the right side of the balance sheet. Business risk - the risk inherent in the operations of the firm, prior to the financing decision. Depends on 2 factors: variability in product demand, production cost. If a high percentage of a firm"s total costs are fixed costs, then the firm is said to have a high degree of operating leverage. Break even = fixed cost/(unit price variable unit cost) Financial risk - he risk added by the use of debt financing. Debt financing increases the variability of earnings before taxes (but after interest). , but their idea that two portfolios with identical cash flows must also have identical values changed the entire financial world because it led to the development of options and derivatives. Modigliani and miller ii: the effect of corporate taxes.

Related Questions

Which of the following is considered a part of financialrisk?

Selected Answer:
Answers:	A. Demand variability
	B. Sales price variability
	C. The extent to which operating costs are fixed
	D. Changes in interest rates on debt
	E. The ability to change prices as costs change

Which of the following is an example of business risk?

Selected Answer:	D. Currency risk
Answers:	A. Default risk
	B. Prepayment risk
	C. Strategic risk
	D. Currency risk
	E. Equity risk

Which of the following leads to less business risks compared toother factors?

Selected Answer:	B. High operating leverage
Answers:	A. High percentage of fixed costs
	B. High operating leverage
	C. More financial risk
	D. High interest rates
	E. More stable operations

Which of the following leads to less business risks compared toother factors?

Selected Answer:	B. High operating leverage
Answers:	A. High percentage of fixed costs
	B. High operating leverage
	C. More financial risk
	D. High interest rates
	E. More stable operations

mauvesalmon287

Which of the following is an indication of a firm's risk with its capital structure?

Indifference point

Coefficient of variation

Earnings per share

Net operating income

Weighted average cost of capital

Which of the following is an advantage of debt financing?

Interest charges on debt is very minimal.

Interest charges on debt are tax deductible.

Interest charges on debt are based on the net income of the firm.

The higher the interest charges, the lower the bankruptcy costs.

Firms that are entirely debt financed have to pay very minimal taxes.

Which of the following is an example of business risk?

Default risk

Prepayment risk

Strategic risk

Currency risk

Equity risk

The percentage change in earnings per share (EPS) that results from a given percentage change in sales is known as the _____.

degree of financial leverage

degree of operating leverage

degree of working capital leverage

degree of current asset leverage

degree of total leverage

viridianrhinoceros464

Which of the following statements is most correct?

		If a firm is exposed to a high degree of business risk as a result of its high operating leverage, then it probably should offset this risk by using a larger-than-average amount of financial leverage. This follows because debt has a lower after-tax cost than equity.
		Financial risk can be reduced by replacing common equity with preferred stock.
		The Hamada equation specifies the effect of financial leverage on beta. It shows how increases in the debt/equity ratio lowers beta.
		In the textbook, it was stated that the capital structure that minimizes the WACC also maximizes the firmâs stock price and its total value, but generally not its expected EPS. One reason given for why debt is beneficial is that it shelters operating income from taxes, while it was stated that a disadvantage of excessive debt has to do with costs associated with bankruptcy and financial distress generally.
		All of the above statements are false.

FIN 380 Chapter Notes - Chapter 16: Operating Leverage, Tax Shield, Pecking Order

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