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Financial Management 2017 - Quiz and Case Study Guides - Foundations of Finance, 9e (Keown/Martin/Petty) - Quiz - Chapter 12

Financial Management 2016 - 2017

FINANCIAL MANAGEMENT 2017 - QUIZ AND CASE STUDY GUIDES

Foundations of Finance, 9e (Keown/Martin/Petty)

Chapter 12   Determining the Financing Mix

 

 

Foundations of Finance, 9e (Keown/Martin/Petty)

Chapter 12   Determining the Financing Mix

 

Learning Objective 12.1

 

1) Business risk refers to the relative dispersion of a firm's earnings before interest and taxes.

Answer:  TRUE

Diff: 1      Page Ref: 408

Keywords:  Business Risk

Learning Obj.:  L.O. 12.1

AACSB:  Reflective Thinking

 

2) Private equity funds tend to focus their investments in situations where promised returns are very high and the need for funds is brief.

Answer:  TRUE

Diff: 1      Page Ref: 407

Keywords:  Private Equity Funds

Learning Obj.:  L.O. 12.1

AACSB:  Reflective Thinking

 

3) The three major components responsible for variation in a company's income stream are business risk, operating risk, and financial risk.

Answer:  TRUE

Diff: 1      Page Ref: 408, 409

Keywords:  Business Risk, Operating Risk, Financial Risk

Learning Obj.:  L.O. 12.1

AACSB:  Reflective Thinking

 

4) Sales of consumer durable goods, such as appliances, are more sensitive to swings in the business cycle, and therefore companies in these industries face a higher level of operating risk.

Answer:  FALSE

Diff: 2      Page Ref: 408, 409

Keywords:  Business Risk, Operating Risk, Business Cycle

Learning Obj.:  L.O. 12.1

AACSB:  Reflective Thinking

 

5) Variation in a company's income stream results from its choice of business line, its choice of an operating cost structure, and its choice of a capital structure.

Answer:  TRUE

Diff: 1      Page Ref: 408, 409

Keywords:  Business Risk

Learning Obj.:  L.O. 12.1

AACSB:  Reflective Thinking

 

6) Business risk refers to the relative dispersion (variability) of a company's net income.

Answer:  FALSE

Diff: 1      Page Ref: 408

Keywords:  Business Risk

Learning Obj.:  L.O. 12.1

AACSB:  Reflective Thinking

 

7) Corporations utilize external financing either because they do not have sufficient earnings to reinvest or they want to rebalance their capital structures.

Answer:  TRUE

Diff: 1      Page Ref: 406

Keywords:  Capital Structure, Internal Financing, External Financing

Learning Obj.:  L.O. 12.1

AACSB:  Reflective Thinking

 

 

8) Companies that sell basic necessities face the highest levels of business risk because consumers will price shop aggressively for items they purchase on a regular basis.

Answer:  FALSE

Diff: 2      Page Ref: 408

Keywords:  Business Risk

Learning Obj.:  L.O. 12.1

AACSB:  Reflective Thinking

 

9) The four basic determinants of business risk include all of the following EXCEPT

  1. A) the stability of the domestic economy.
  2. B) the level of fixed cost used in the company's production process.
  3. C) sensitivity to the business cycle.
  4. D) competitive pressures in the firm's industry.

Answer:  B

Diff: 1      Page Ref: 409

Keywords:  Business Risk

Learning Obj.:  L.O. 12.1

AACSB:  Reflective Thinking

 

10) A high degree of variability in a firm's earnings before interest and taxes refers to

  1. A) business risk.
  2. B) financial risk.
  3. C) financial leverage.
  4. D) operating leverage.

Answer:  A

Diff: 2      Page Ref: 408

Keywords:  Business Risk

Learning Obj.:  L.O. 12.1

AACSB:  Reflective Thinking

 

11) Business risk refers to

  1. A) the risk associated with financing a firm with debt.
  2. B) the variability of a firm's expected earnings before interest and taxes.
  3. C) the uncertainty associated with a firm's CAPM.
  4. D) the variability of a firm's stock price.

Answer:  B

Diff: 1      Page Ref: 408

Keywords:  Business Risk

Learning Obj.:  L.O. 12.1

AACSB:  Reflective Thinking

 

12) What are the three determinants of the volatility of a firm's earnings?

Answer:  The sources of volatility in the firm's income stream into one of three sources:

Business risk — the variation in firm earnings that arises out of the natural volatility in revenues attributable to the industry in which it operates. For example, if the firm operates in a highly volatile industry in which revenues fluctuate with the business cycle, then the firm's earnings will be more volatile than another firm that operates in an industry that is less sensitive to the business cycle.

Operating risk — volatility in the firm's operating earnings that results from the firm's cost structure, that is, the mix of fixed and variable operating costs the firm pays to do business. Greater fixed operating costs (versus variable costs) increase the variability in operating earnings in response to changes in revenues. The firm's mixture of fixed versus variable operating costs is largely determined by the industry in which the firm operates.

Financial risk — variation in the firm's earnings that results from its use of financing sources that require a fixed return, such as debt financing.

Diff: 1      Page Ref: 408, 409

Keywords:  Business Risk, Operating Risk, Financial Risk

Learning Obj.:  L.O. 12.1

AACSB:  Reflective Thinking

 

13) Describe the sources of business risk.

Answer:  Four basic determinants of a firm's business risk:

The stability of the domestic economy. Firms that operate in more volatile economies, such as those of developing nations, are subject to swings in revenue that are much more severe than those experienced by firms that operate within developed countries.

The exposure to, and stability of, foreign economies. In today's global economy, more and more firms produce and sell their products in multiple countries. This means that it is not only the natural volatility of the firm's home country that drives the volatility of the firm's revenues but also that of the countries in which its goods and services are produced and sold.

Sensitivity to the business cycle. Some industries are more sensitive to the business cycle than others. For example, the sales of consumer durable goods such as automobiles, housing, and appliances tend to be more sensitive to swings in the business cycle than the sales of necessities such as food and clothing.

Competitive pressures in the firm's industry. Here we refer to the forces of other firms within the firm's marketplace that provide the same (or close substitute) products and services. Greater competitive pressures will force the firm to make price concessions sooner and deeper than would otherwise be the case.

Diff: 3      Page Ref: 409

Keywords:  Business Risk

Learning Obj.:  L.O. 12.1

AACSB:  Reflective Thinking

 

Learning Objective 12.2

 

1) A key tool for evaluating business risk is break-even analysis.

Answer:  FALSE

Diff: 1      Page Ref: 410

Keywords:  Business Risk, Operating Risk, Break-Even Analysis

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

 

2) The break-even quantity of output is that quantity of output, in units, that results in an EBIT equal to zero.

Answer:  TRUE

Diff: 1      Page Ref: 410

Keywords:  Break-even Quantity, EBIT

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

 

3) Break-even analysis is a short-term concept because, in the long run, all costs are variable.

Answer:  TRUE

Diff: 1      Page Ref: 410

Keywords:  Break-even Analysis

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

 

4) As production levels increase, fixed costs stay the same in total, but decrease on a per unit basis.

Answer:  TRUE

Diff: 1      Page Ref: 410

Keywords:  Fixed Costs Per Unit

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

5) Break-even analysis ignores fixed costs because fixed costs do not change.

Answer:  FALSE

Diff: 1      Page Ref: 410

Keywords:  Break-even Analysis, Fixed Costs

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

 

6) Fixed costs are called indirect costs while variable costs are called direct costs.

Answer:  TRUE

Diff: 1      Page Ref: 410

Keywords:  Fixed Costs, Variable Costs, Direct Costs, Indirect Costs

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

 

7) As the volume of production increases the variable cost-per unit of the product decreases.

Answer:  FALSE

Diff: 1      Page Ref: 410

Keywords:  Variable Cost Per Unit

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

8) A decrease in the level of production results in decreased fixed cost per unit.

Answer:  FALSE

Diff: 1      Page Ref: 410

Keywords:  Fixed Costs Per Unit

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

9) If sales double, the break-even model assumes that total variable costs will double.

Answer:  TRUE

Diff: 1      Page Ref: 411

Keywords:  Break-even, Variable Costs

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

10) The break-even model assumes that selling price per unit and variable cost per unit of output are constant over the relevant range of output.

Answer:  TRUE

Diff: 1      Page Ref: 412

Keywords:  Break-even Model, Selling Price Per Unit, Variable Cost Per Unit

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

 

11) If fixed costs are $150,000, price per unit is $10, and variable cost per unit is $4, the break-even point is 15,000 units.

Answer:  FALSE

Diff: 1      Page Ref: 412

Keywords:  Break-even Point

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

12) Fixed costs per unit vary inversely with production output.

Answer:  TRUE

Diff: 1      Page Ref: 410

Keywords:  Fixed Costs Per Unit

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

 

13) Over the relevant range of output, fixed costs remain unchanged.

Answer:  TRUE

Diff: 1      Page Ref: 410

Keywords:  Fixed Costs, Relevant Range

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

 

14) Jones Blanket Company sells blankets for $25 each. The variable cost of each blanket is $10. If fixed cost is $4,500,000, then the break-even point is 300,000 units.

Answer:  TRUE

Diff: 2      Page Ref: 412

Keywords:  Break-even Point

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

15) Depreciation is considered a fixed cost.

Answer:  TRUE

Diff: 2      Page Ref: 410

Keywords:  Depreciation, Fixed Cost

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

 

16) Fixed operating costs include charges incurred from the firm's use of debt financing.

Answer:  FALSE

Diff: 2      Page Ref: 410

Keywords:  Fixed Operating Costs, Debt Financing

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

 

17) In break-even analysis, semivariable costs are segregated into their fixed and variable components over the relevant range of output.

Answer:  TRUE

Diff: 1      Page Ref: 411

Keywords:  Semivariable Costs, Break-Even Analysis

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

 

18) Break-even analysis assumes that a multiproduct firm maintains a constant production and sales mix.

Answer:  TRUE

Diff: 2      Page Ref: 413

Keywords:  Break-even Analysis, Multiproduct Firm

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

 

19) Kohler Manufacturing typically achieves one of three production levels in any given year: 8 million pounds of steel, 10 million pounds of steel, or 16 million pounds of steel. In tracking some of its costs, Kohler's controller discovered one cost that was $10 per pound at a production level of 8 million pounds, $8 per pound at a production level of 10 million pounds, and $5 per pound at a production level of 16 million pounds. This is an example of a

  1. A) variable cost.
  2. B) fixed cost.
  3. C) semivariable cost.
  4. D) semifixed cost.

Answer:  B

Diff: 2      Page Ref: 410

Keywords:  Fixed Costs Per Unit

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

 

 

20) Kohler Manufacturing typically achieves one of three production levels in any given year: 8 million pounds of steel, 10 million pounds of steel, or 16 million pounds of steel. In tracking some of its costs, Kohler's controller discovered one cost that was $10 per pound no matter what the production level for the year. This is an example of a

  1. A) variable cost.
  2. B) fixed cost.
  3. C) semivariable cost.
  4. D) semifixed cost.

Answer:  A

Diff: 2      Page Ref: 410

Keywords:  Variable Cost, Variable Cost per Unit

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

21) The break-even model enables the manager of the firm to

  1. A) calculate the minimum price of common stock for certain situations.
  2. B) set appropriate equilibrium thresholds.
  3. C) determine the quantity of output that must be sold to cover all operating costs.
  4. D) determine the optimal amount of debt financing to use.

Answer:  C

Diff: 1      Page Ref: 410

Keywords:  Break-even Model

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

 

22) As production levels increase,

  1. A) variable costs per unit decrease.
  2. B) fixed costs per unit increase.
  3. C) fixed costs per unit stay the same and variable costs per unit increase.
  4. D) fixed costs per unit decrease and variable costs per unit stay the same.

Answer:  D

Diff: 1      Page Ref: 410

Keywords:  Fixed Costs, Variable Costs

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

23) The break-even point is equal to

  1. A) fixed costs divided by (sales price per unit - variable cost per unit).
  2. B) fixed costs divided by unit variable costs.
  3. C) fixed costs divided by selling price per unit.
  4. D) (sales price per unit - variable cost per unit) times the fixed costs.

Answer:  A

Diff: 1      Page Ref: 412

Keywords:  Break-even Point, Fixed Costs, Variable Costs

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

 

24) HomeCraft makes wooden play sets. The company pays annual rent of $400,000 per year and pays administrative salaries totaling $150,000 per year. Each play set requires $400 of wood, ten hours of labor at $70 per hour, and variable overhead costs of $100. Fixed advertising expenses equal $100,000 per year. Each play set sells for $3,200. What is HomeCraft's break-even output level?

  1. A) 340 play sets
  2. B) 325 play sets
  3. C) 297 play sets
  4. D) 258 play sets

Answer:  B

Diff: 2      Page Ref: 412

Keywords:  Break-even Output, Variable Costs, Fixed Costs

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

25) QuadCity Manufacturing, Inc. reported the following items: Sales = $6,000,000; Variable Costs of Production = $1,500,000; Variable Selling and Administrative Expenses = $550,000; Fixed Costs = $1,350,000; EBIT = $2,600,000; and the Marginal Tax Rate = 35%. QuadCity's break-even point in sales dollars is

  1. A) $2,050,633.
  2. B) $2,197,500.
  3. C) $2,438,750.
  4. D) $2,785,000.

Answer:  A

Diff: 2      Page Ref: 413

Keywords:  Break-even Point, Fixed Costs, Variable Costs

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

26) Variable costs include all of the following EXCEPT

  1. A) property taxes.
  2. B) direct labor.
  3. C) sales commissions.
  4. D) annual rent.

Answer:  A

Diff: 1      Page Ref: 413

Keywords:  Variable Cost

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

 

27) Which of the following is a fixed cost?

  1. A) insurance
  2. B) direct material
  3. C) direct labor
  4. D) freight costs on products

Answer:  A

Diff: 1      Page Ref: 410

Keywords:  Fixed Costs

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

 

28) A plant may remain operating when sales are depressed

  1. A) if the selling price per unit exceeds the variable cost per unit.
  2. B) to help the local economy.
  3. C) in an effort to cover at least some of the variable cost.
  4. D) unless variable costs are zero when production is zero.

Answer:  A

Diff: 2      Page Ref: 410

Keywords:  Break-even Analysis

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

29) Potential applications of the break-even model include

  1. A) replacement for time-adjusted capital budgeting techniques.
  2. B) pricing policy.
  3. C) optimizing the cash-marketable securities position of a firm.
  4. D) all of the above.

Answer:  B

Diff: 2      Page Ref: 410

Keywords:  Break-even Model, Pricing Policy

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

 

30) Break-even analysis is used to study the effect on EBIT of changes in all of the following EXCEPT

  1. A) corporate taxes.
  2. B) prices.
  3. C) cost structure.
  4. D) volume.

Answer:  A

Diff: 2      Page Ref: 410, 411

Keywords:  Break-even Analysis

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

 

 

31) Based on the data contained in Table A, what is the break-even point in units produced and sold?

 

TABLE A

Average selling price per unit

$18.00

Variable cost per unit

$13.00

Units sold

400,000

Fixed costs

$650,000

Interest expense

$50,000

 

  1. A) 130,000
  2. B) 140,000
  3. C) 150,000
  4. D) 180,000

Answer:  A

Diff: 2      Page Ref: 412

Keywords:  Break-even Units

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

32) Based on the data contained in Table A, what is the break-even point in sales dollars?

 

TABLE A

Average selling price per unit

$18.00

Variable cost per unit

$13.00

Units sold

400,000

Fixed costs

$650,000

Interest expense

$50,000

 

  1. A) $2,340,000
  2. B) $1,850,000
  3. C) $1,775,500
  4. D) $700,000

Answer:  A

Diff: 2      Page Ref: 413

Keywords:  Break-even Sales

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

 

33) Rogue Tire Masters has fixed costs of $220,000. Tires sell for $95 each and have a unit variable cost of $45. What is Rogue's break-even point in units?

  1. A) 4,000
  2. B) 4,400
  3. C) 5,200
  4. D) 5,500

Answer:  B

Diff: 2      Page Ref: 412

Keywords:  Break-even Units

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

34) The break-even point in sales dollars is convenient if

  1. A) the firm sells a large amount of one product.
  2. B) the firm deals with more than one product.
  3. C) the price per unit is very low.
  4. D) depreciation expense is high.

Answer:  B

Diff: 2      Page Ref: 413

Keywords:  Break-even Point in Sales Dollars

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

35) Which of the following would be considered a fixed cost in a manufacturing setting?

  1. A) depreciation
  2. B) direct labor
  3. C) sales commissions
  4. D) direct materials

Answer:  A

Diff: 1      Page Ref: 410

Keywords:  Fixed Manufacturing Costs, Depreciation

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

36) Which of the following would be considered a variable cost in a manufacturing setting?

  1. A) rent
  2. B) administrative salaries
  3. C) insurance
  4. D) direct labor

Answer:  D

Diff: 1      Page Ref: 411

Keywords:  Variable Manufacturing Costs, Direct Labor

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

 

 

37) Mix Sweet Shop bakes and sells pies. Mix has annual fixed costs of $880,000 and a variable cost per pie of $7.50. Each pie sells for $15.50 each. The firm expects to sell 500,000 pies annually. What is the break-even point in pies?

  1. A) 190,440
  2. B) 280,000
  3. C) 200,000
  4. D) 110,000

Answer:  D

Diff: 2      Page Ref: 412

Keywords:  Break-even Units

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

38) Mix Sweet Shop bakes and sells pies. Mix has annual fixed costs of $880,000 and a variable cost per pie of $7.50. Each pie sells for $15.50 each. The firm expects to sell 500,000 pies annually. What is the break-even point in sales dollars?

  1. A) $3,100,000
  2. B) $2,875,000
  3. C) $1,705,000
  4. D) $1,625,000

Answer:  C

Diff: 2      Page Ref: 413

Keywords:  Break-even Point in Sales Dollars

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

39) All of the following will make the break-even point increase, other things equal, EXCEPT

  1. A) fixed costs increase.
  2. B) the sales price per unit is decreased due to competition.
  3. C) variable costs increase due to higher direct labor cost.
  4. D) the number of units sold for the year decreased.

Answer:  D

Diff: 2      Page Ref: 412

Keywords:  Break-even Point

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

40) Voellers Upholstery Co. produces inexpensive leather chairs. The average selling price for one of the chairs is $400. The variable cost per chair is $250. Voellers has average fixed costs per year of $450,000.

  1. What is the break-even point in units?
  2. What is the break-even point in dollar sales?
  3. What would be the operating profit or loss associated with the production and sale of

       (1) 3,000 chairs, (2) 4,000 chairs?

Answer: 

  1. QBE = $450,000/($400-$250) = 3,000
  2. S = 3,000 × $400 = $1,200,000
  3. (1) 3,000 × $400 = $1,200,000

                -3,000 × $250 = - 750,000

                                          - 450,000

        Operating Profit                 $0

 

        (2)   4,000 × $400 = $1,600,000

              -4,000 × $250 =  -1,000,000

                                            -450,000

        Operating Profit       $150,000

Diff: 2      Page Ref: 413-414

Keywords:  Break-even, Operating Profit

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

41) ABC Corp. has estimated the following income statement for its next fiscal year.

 

Sales

$20,000,000

Variable costs

6,000,000

Revenue before fixed costs

14,000,000

Fixed costs

9,000,000

EBIT

5,000,000

Interest expense

900,000

Earnings before taxes

4,100,000

Taxes (35%)

1,435,000

Net income

$2,665,000

 

  1. What is the break-even point in sales dollars for the firm?
  2. If the average unit cost is $20, what is the break-even point in units?

Answer: 

  1. $9,000,000/(1 - ($6,000,000/$20,000,000)) = $12,857,143
  2. $12,857,143/$20 = 642,857 units

Diff: 2      Page Ref: 412

Keywords:  Operating Leverage, Financial Leverage, Combined Leverage, Break-even Point

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

42) Techno Robots produces a functioning toy robot. At a production and sales level of 10,000 robots, the firm has the following information:

Selling price per unit = $15

Variable costs per unit = $8

EBIT = $17,500

 

What is the break-even point in units for the firm?

Answer:  QBE

Sales = $15 × 10,000 robots = $150,000

Variable Costs = $8 × 10,000 robots = $80,000

EBIT = $150,000 - $80,000 - fixed costs = $17,500

Therefore, fixed costs = $52,500

Break-even = $52,500/($15 - $8) = 7,500 robots

Diff: 2      Page Ref: 412

Keywords:  Break-even Point in Units

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

43) Wheely Bike Manufacturers expects to produce and sell 9,000 made-to-order bicycles this year. Variable costs are 40 percent of sales while fixed costs total $600,000. At what price must each bicycle be sold for Wheely to earn EBIT of $450,000?

Answer:  9,000P - (.40)(9,000)P - $600,000 = $450,000

9,000P - 3,600P - $600,000 = $450,000

5,400P = $1,050,000

P = $194.44

Diff: 2      Page Ref: 413

Keywords:  Break-even Analysis, EBIT, Selling Price

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

44) JKE, Inc. has a break-even sales level of $10,000,000 and has fixed costs of $4,000,000 per year. The selling price per unit is $200. What is the variable cost per unit?

Answer:  At break-even S - VC = FC

$10,000,000 - VC = $4,000,000

VC = $6,000,000

 

Number of units sold = $10,000,000/$200 = 50,000 units

 

Variable cost per unit = $6,000,000/50,000 = $120.00

Diff: 2      Page Ref: 412-413

Keywords:  Cost-Volume-Profit Analysis, Break-even Point in Sales, Variable Cost per Unit

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

45) DXZ, Inc. currently produces one product which sells for $250 per unit. The company's fixed costs are $75,000 per year; variable costs are $205 per unit. A salesman has offered to sell the company a new piece of equipment which will increase fixed costs to $100,000. The salesman claims that the company's break-even point will not be altered if the company purchases this equipment. What will be the company's new variable cost per unit?

Answer: 

Current break-even point = $75,000/($250 - $205) = 1,667 units

 

$100,000/($250 - VC) = 1,667 units

 

1,667 ($250 - VC) = $100,000

$416,750 - 1,667 VC = $100,000

-1,667 VC = -$316,750

VC = $190.01

Diff: 2      Page Ref: 412

Keywords:  Break-even Analysis, Variable Cost per Unit

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

46) Stan's Cans, Inc. expects to earn $150,000 next year after taxes on sales of $2,200,000. Stan's manufactures only one size of garbage can. Stan sells his cans for $8 apiece and they have a variable cost of $2.40 apiece. Stan's tax rate is currently 34%.

  1. What are the firm's expected fixed costs for next year?
  2. What is the break-even point in units?

Answer: 

  1. ([P × Q] - [(V × Q) + F]) (1 - T) = $150,000

        (2,200,000 - 660,000 - F)(.66)       = $150,000

                         (1,540,000 - F)(.66)      = $150,000

                                             866,400      = .66F

                                                     F       = 1,312,727

  1. Q = $1,312,727/($8 - $2.4) = 234,416 units

Diff: 2      Page Ref: 412

Keywords:  Break-even Point, Fixed Costs

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

47) The Western Boot Company will produce 94,000 pairs of boots next year. Variable costs are 35 percent of sales, while fixed costs total $223,000. At what price must each pair of boots be sold for Western to obtain an EBIT of $1,391,500?

Answer: 

94,000P - (0.35)(94,000)P - 223,000 = 1,391,500

94,000P - 32,900P - 223,000               = 1,391,500

                                          61,100P     = 1,614,500

                                                     P     = $26.42

Diff: 2      Page Ref: 412

Keywords:  Cost-Volume-Profit Analysis

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

48) The Knight Corporation projects that next year its fixed costs will total $240,000. Its only product sells for $34 per unit, of which $18 is a variable cost. The management of Knight is considering the purchase of a new machine that will lower the variable cost per unit to $14. The new machine, however, will add to fixed costs through an increase in depreciation expense. How large can the addition to fixed costs be in order to keep the firm's break-even point in units produced and sold unchanged?

Answer: 

Step 1 Compute the percent level of break-even output:

QB = F/(P-V) = $240,000/($34-$18) = 15,000 units

 

Step 2 Compute the new level of fixed cost at the break-even output:

F + (14) (15,000) = 34 (15,000)

       F + 210,000    = 510,000

                     F       = 300,000

 

Step 3  Compute the addition to fixed costs

$300,000 - $240,000 = $60,000 addition

Diff: 3      Page Ref: 412

Keywords:  Break-even Analysis

Learning Obj.:  L.O. 12.2

AACSB:  Analytical Thinking

 

49) When is it useful or sometimes necessary to compute the break-even point in terms of sales dollars rather than units of output?

Answer:  For the multiproduct firm, it is convenient to compute the break-even point in terms of sales dollars rather than units sold. Sales, in effect, become a common denominator associated with a particular product mix. Furthermore, an outside analyst might not have access to internal unit cost data. He or she may, however, be able to obtain annual reports for the firm. If the analyst can separate the firm's total costs as identified from its annual reports into their fixed and variable components, he or she can calculate a general break-even point in sales dollars.

Diff: 2      Page Ref: 413

Keywords:  Break-even Point in Sales Dollars

Learning Obj.:  L.O. 12.2

AACSB:  Reflective Thinking

 

Learning Objective 12.3

 

1) Operating leverage is easier to control and manage than financial leverage because operating leverage deals with the internal workings of the company while financing deals with outside parties.

Answer:  FALSE

Diff: 1      Page Ref: 415

Keywords:  Operating Leverage, Financial Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

 

2) A company that sells common stock and uses the money to pay off a loan is increasing its use of financial leverage.

Answer:  FALSE

Diff: 1      Page Ref: 416

Keywords:  Financial Leverage, Common Stock, Debt

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

3) A company that sells preferred stock and uses the money to pay off a loan is decreasing its amount of financial leverage.

Answer:  FALSE

Diff: 1      Page Ref: 416

Keywords:  Financial Leverage, Preferred Stock, Debt

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

4) Financial risk applies to both the additional variability in earnings available to common shareholders and the additional chance of insolvency caused by the use of financial leverage.

Answer:  TRUE

Diff: 1      Page Ref: 416

Keywords:  Financial Risk, Variability, Insolvency, Financial Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

5) A CEO concerned about variability of earnings per share may try to offset high operating leverage with a capital structure that is mostly debt in order to take advantage of the interest tax shield.

Answer:  FALSE

Diff: 1      Page Ref: 418

Keywords:  Variability of EPS, Combined Leverage, Operating Leverage, Financial Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

6) Operating leverage means financing a portion of a firm's earnings per share with debt.

Answer:  FALSE

Diff: 1      Page Ref: 414

Keywords:  Operating Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

7) Operating leverage contributes ultimately to the variability of a firm's earnings per share.

Answer:  TRUE

Diff: 1      Page Ref: 414

Keywords:  Operating Leverage, Variability of EPS

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

 

8) Operating leverage is measured as the responsiveness of the firm's earnings before interest and taxes relative to fluctuations in sales.

Answer:  TRUE

Diff: 2      Page Ref: 414

Keywords:  Operating Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

9) Financial leverage is typically more under the control of management than is operating leverage because the nature of the product often dictates the type of production process needed.

Answer:  TRUE

Diff: 2      Page Ref: 414, 416

Keywords:  Operating Leverage, Financial Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

10) Operating leverage is the responsiveness of a firm's EBIT to changes in sales revenues.

Answer:  TRUE

Diff: 1      Page Ref: 414

Keywords:  Operating Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

11) The more fixed-charge securities (such as bonds and preferred stock) the firm employs in its financial structure, the greater its financial leverage.

Answer:  TRUE

Diff: 2      Page Ref: 416

Keywords:  Financial Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Analytical Thinking

 

12) An increase in financial leverage will increase the absolute value of EPS, everything else equal.

Answer:  TRUE

Diff: 2      Page Ref: 416

Keywords:  Financial Leverage, EPS

Learning Obj.:  L.O. 12.3

AACSB:  Analytical Thinking

 

13) If a company sells bonds and uses the proceeds to buy back common stock, the company's financial leverage with increase.

Answer:  TRUE

Diff: 2      Page Ref: 416

Keywords:  Financial Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Analytical Thinking

 

 

14) The presence of debt and/or preferred stock in a firm's financial structure means the firm is using financial leverage.

Answer:  TRUE

Diff: 1      Page Ref: 416

Keywords:  Debt, Preferred Stock, Financial Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

15) Because fixed costs do not vary with a firm's revenues, firms with high levels of fixed cost enjoy lower levels of operating risk because their costs are more certain, making budgeting easier.

Answer:  FALSE

Diff: 1      Page Ref: 414

Keywords:  Fixed Costs, Operating Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Analytical Thinking

 

16) If a firm's production process requires high operating leverage (use of fixed costs), then the firm should finance its assets with debt, so that the cost of capital will be reduced and financing costs will remain fixed.

Answer:  FALSE

Diff: 2      Page Ref: 414

Keywords:  Operating Leverage, Financial Leverage, Total Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Analytical Thinking

 

17) Because financial markets can be extremely volatile, with bond and stock prices changing significantly from day to day, a firm's management has much greater control over the firm's operating leverage than over its financial leverage.

Answer:  FALSE

Diff: 2      Page Ref: 414

Keywords:  Operating Leverage, Financial Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

18) All of the following are likely to result in the use of less debt in a company's capital structure EXCEPT

  1. A) desire to maintain financial flexibility.
  2. B) desire to maintain a high credit rating.
  3. C) insufficient internal funds.
  4. D) a decrease in a company's marginal tax rate.

Answer:  C

Diff: 2      Page Ref: 416

Keywords:  Optimal Capital Structure, Financial Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

 

19) Which of the following transactions will lower a company's financial leverage?

  1. A) A mortgage loan is obtained and the proceeds are used to pay off existing short-term debt.
  2. B) Preferred stock is sold and the proceeds are used to pay off existing short-term debt.
  3. C) Common stock is sold and the proceeds are used to pay off existing short-term debt.
  4. D) Short-term debt is obtained to get the company through a period of negative net income and cash flow.

Answer:  C

Diff: 1      Page Ref: 416

Keywords:  Financial Leverage, Common Stock, Debt

Learning Obj.:  L.O. 12.3

AACSB:  Analytical Thinking

20) Dakota Oil, Inc. reported that its sales and EBIT increased by 10%, but its EPS increased by 30%. The much larger change in earnings per share could be the result of

  1. A) high operating leverage.
  2. B) high financial leverage.
  3. C) a high percentage of credit sale collections from prior years.
  4. D) high fixed costs of production.

Answer:  B

Diff: 2      Page Ref: 416

Keywords:  Financial Leverage, Operating Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

21) ACME, Inc. reported the following income statement for 2009:

 

Sales

$2,500,000

Variable Costs

900,000

Fixed Operating Costs

700,000

EBIT

900,000

Interest Expense

200,000

EBT

700,000

Taxes (30%)

210,000

Net Income

$490,000

Earnings Per Share

$4.90

 

If ACME's sales next year increase by 20%, what will ACME's earnings per share be?

  1. A) $5.76
  2. B) $6.45
  3. C) $7.14
  4. D) $7.58

Answer:  C

Diff: 3      Page Ref: 414, 416

Keywords:  Operating Leverage, Financial Leverage, Earnings Per Share

Learning Obj.:  L.O. 12.3

AACSB:  Analytical Thinking

 

22) ACME, Inc. reported the following income statement for 2009:

 

Sales

$2,500,000

Variable Costs

900,000

Fixed Operating Costs

700,000

EBIT

900,000

Interest Expense

200,000

EBT

700,000

Taxes (30%)

210,000

Net Income

$490,000

Earnings Per Share

$4.90

 

If ACME's sales next year increase by 20%, ACME's EBIT will increase

  1. A) 20%, showing no operating leverage.
  2. B) 20%, showing no financial leverage.
  3. C) over 35%, due to operating leverage.
  4. D) over 35%, due to operating leverage and financial leverage.

Answer:  C

Diff: 3      Page Ref: 414, 416

Keywords:  Operating Leverage, Financial Leverage, Earnings Per Share

Learning Obj.:  L.O. 12.3

AACSB:  Analytical Thinking

 

23) Amalgamated Mining, Inc. has very high operating leverage due to the capital intensive nature of the steel business. The firm's CEO is concerned about the variability in the firm's EPS if sales should drop, and decides to take action. Which of the following will reduce the variability in the firm's EPS for a given change in sales?

  1. A) The CEO may increase the firm's financial leverage and hence reduce the variability by using non-shareholder money to support the business.
  2. B) The CEO may decrease the firm's financial leverage, thus lowering the firm's total leverage.
  3. C) The CEO may increase the firm's total leverage by raising money from the sale of common stock.
  4. D) The CEO may issue more corporate bonds and use the proceeds to pay off short-term liabilities.

Answer:  B

Diff: 1      Page Ref: 414, 416, 418

Keywords:  Operating Leverage, Financial Leverage, Total Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

24) Bristal Boats, Inc. reports sales of $4,000,000, variable costs of $500,000, fixed operating costs of $1,250,000, and interest expense of $350,000. The corporation's EBIT is $3,250,000 and its marginal tax rate is 30%. If the corporation is able to increase its sales by 25%, then

  1. A) its EBIT will increase by 25% and its EPS will increase by 25%.
  2. B) its EBIT will increase by more than 25% and its EPS will increase by less than 25%.
  3. C) its EBIT and EPS will both increase, but less than 25% due to fixed costs and taxes.
  4. D) its EBIT will increase by more than 25% and its EPS will increase by more than the percentage increase in EBIT.

Answer:  D

Diff: 2      Page Ref: 414, 416, 418

Keywords:  Financial Leverage, Combined Leverage, Operating Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Analytical Thinking

 

25) A firm that uses large amounts of debt financing in an industry characterized by a high degree of business risk would have ________ earnings per share fluctuations resulting from changes in levels of sales.

  1. A) no
  2. B) constant
  3. C) large
  4. D) small

Answer:  C

Diff: 2      Page Ref: 416

Keywords:  Business Risk, Financial Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

26) Financial leverage could mean financing some of a firm's assets with

  1. A) preferred stock.
  2. B) retained earnings.
  3. C) private equity capital.
  4. D) sales revenues.

Answer:  A

Diff: 2      Page Ref: 416

Keywords:  Financial Leverage, Bonds

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

27) Financing a portion of a firm's assets with securities bearing a fixed rate of return in hopes of increasing the return to stockholders refers to

  1. A) business risk.
  2. B) financial leverage.
  3. C) operating leverage.
  4. D) combined leverage.

Answer:  B

Diff: 2      Page Ref: 416

Keywords:  Financial Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

28) Operating leverage refers to

  1. A) financing a portion of the firm's assets with securities bearing a fixed rate of return.
  2. B) the additional chance of insolvency borne by the common shareholder.
  3. C) the incurrence of fixed operating costs in the firm's income stream.
  4. D) a high degree of variable costs of production.

Answer:  C

Diff: 2      Page Ref: 416

Keywords:  Operating Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

29) Financial leverage is distinct from operating leverage since it accounts for

  1. A) use of debt and preferred stock.
  2. B) variability in fixed operating costs.
  3. C) variability in sales.
  4. D) changes in EBIT.

Answer:  A

Diff: 2      Page Ref: 414, 416

Keywords:  Financial Leverage, Operating Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

30) If a firm has no operating leverage and no financial leverage, then a 10% increase in sales will have what effect on EPS?

  1. A) EPS will remain the same.
  2. B) EPS will increase by 10%.
  3. C) EPS will decrease by 10%.
  4. D) EPS will increase by less than 10%.

Answer:  B

Diff: 2      Page Ref: 414, 416, 418

Keywords:  Operating Leverage, Financial Leverage, Combined Leverage, EPS

Learning Obj.:  L.O. 12.3

AACSB:  Analytical Thinking

 

31) Operating leverage has to do with

  1. A) borrowing money to finance a firm's growth.
  2. B) using preferred stock to increase sales volume.
  3. C) the incurrence of fixed operating costs in the firm's income stream.
  4. D) financing with fixed cost sources of capital.

Answer:  C

Diff: 1      Page Ref: 414

Keywords:  Operating Leverage, Fixed Operating Costs

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

32) Which of the following statements about operating leverage is true?

  1. A) Operating leverage reduces a firm's risk.
  2. B) Operating leverage is the responsiveness of the firm's EBIT to fluctuations in sales.
  3. C) Operating leverage involves the usage of fixed cost financial securities in the operation of a business.
  4. D) Operating leverage is the responsiveness of the firm's EPS to fluctuations in sales.

Answer:  B

Diff: 1      Page Ref: 414

Keywords:  Operating Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

33) Financial leverage has to do with

  1. A) the usage of fixed cost financial securities to finance a portion of a firm's assets.
  2. B) using common stock to finance a portion of a firm's assets.
  3. C) the incurrence of fixed operating costs in the firm's income stream.
  4. D) a high gross profit margin.

Answer:  A

Diff: 1      Page Ref: 416

Keywords:  Financial Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

34) Which of the following statements about financial leverage is true?

  1. A) Financial leverage is the responsiveness of the firm's EBIT to fluctuations in sales.
  2. B) Financial leverage involves the incurrence of fixed operating costs in the firm's income stream.
  3. C) Financial leverage is the responsiveness of the firm's EPS to fluctuations in EBIT.
  4. D) Financial leverage reduces a firm's risk.

Answer:  C

Diff: 1      Page Ref: 416

Keywords:  Financial Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

35) Which of the following statements about combined (operating & financial) leverage is true?

  1. A) If a firm employs both operating and financial leverage, any percent change in sales will produce a larger percent change in earnings per share.
  2. B) A firm that is in a capital-intensive industry should use a higher level of financial leverage than a firm that employs low levels of operating leverage.
  3. C) Usage of both operating and financial leverage reduces a firm's risk.
  4. D) High operating leverage and high financial leverage offset one another, meaning that if sales increase by 10%, then EPS will also increase by 10%.

Answer:  A

Diff: 2      Page Ref: 418

Keywords:  Combined Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

36) The following information pertains to the Classic Burger Restaurant chain:

 

Sales

$600,000

Variable costs

300,000

Total contribution margin

300,000

Fixed costs

100,000

EBIT

200,000

Interest expense

50,000

Earnings before taxes

150,000

Taxes (30%)

45,000

Net income

$105,000

 

  1. If sales increase by 10%, what will be the new level of EPS if the firm has 100,000 shares outstanding?
  2. What is the percentage increase in EPS? Explain the difference between the percentage increase in sales and the percentage increase in EPS.

Answer: 

a.

 

Sales

$600,000

× 1.1 =

$660,000

Variable costs

300,000

× 1.1 =

330,000

Total contribution margin

300,000

 

330,000

Fixed costs

100,000

 

100,000

EBIT

200,000

 

230,000

Interest expense

50,000

 

50,000

Earnings before taxes

150,000

 

180,000

Taxes (30%)

45,000

 

54,000

Net income

$105,000

 

$126,000

Earnings Per Share

$10.50

 

$12.60

 

  1. ($12.60 - $10.50)/$10.50 = .20 or 20%; A 10% increase in sales results in a 20% increase in EPS due to leverage. Classic Burger uses both operating leverage (fixed cost of operations) and financial leverage (debt financing reflected in interest expense).

Diff: 2      Page Ref: 414, 416, 418

Keywords:  Operating Leverage, Financial Leverage, Combined Leverage, EPS

Learning Obj.:  L.O. 12.3

AACSB:  Analytical Thinking

 

37) How do operating and financial leverage interact to affect the volatility of a firm's earnings per share?

Answer:  Operating leverage causes changes in sales revenues to lead to even greater changes in EBIT. Additionally, changes in EBIT due to financial leverage translate into larger variations in both earnings per share (EPS) and the net income available to the common shareholders (NI), if the firm chooses to use financial leverage. It should be no surprise, then, to find out that combining operating and financial leverage (combined, or total, leverage), causes rather large variations in earnings per share.

Diff: 2      Page Ref: 418

Keywords:  Financial Leverage, Combined Leverage, Operating Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Reflective Thinking

 

38) Welker Products sells small kitchen gadgets for $15 each. The gadgets have a variable cost of $4 per unit, and Welker Products' fixed operating costs are $220,000 per year. Welker Products' capital structure includes 55% debt and 45% equity. Annual interest expense is $25,000, and the corporate tax rate is 35%.

  1. Calculate the break-even point in units.
  2. If Welker Products sells 25,000 units, calculate the firm's EBIT and net income.
  3. If sales increase ten percent from 25,000 units to 30,000 units, estimate the firm's expected EBIT and net income.
  4. Does Welker Products use operating leverage and/or financial leverage? Explain.

Answer: 

  1. Break-even = ($220,000/($15 - $4)) = 20,000 units
  2. Sales = 25,000 ∗ $14 = $350,000

       Variable Costs = 25,000 ∗ $4 = $100,000

       Fixed Costs = $220,000

       EBIT = $350,000 - $100,000 - $220,000 = $30,000

       EBT = $30,000 - $25,000 = $5,000

       Net Income = $5,000 (1 - 0.35) = $3,250

  1. Sales = 30,000 ∗ $14 = $420,000

       Variable Costs = 30,000 ∗ $4 = $120,000

       Fixed Costs = $220,000

       EBIT = $420,000 - $120,000 - $220,000 = $80,000

       EBT = $80,000 - $25,000 = $55,000

       Net Income = $55,000 (1 - 0.35) = $35,750

  1. EBIT increased by (80,000 - 30,000)/30,000 = 167% and Net Income

       increased by (35,750 - 3,250)3,25 = 1,000%

Since EBIT increased by a higher percentage than sales (167% compared to 20%), the company uses operating leverage. Since the change in EPS is greater than the change in EBIT (1,000% compared to 167%), the company uses financial leverage.

Diff: 2      Page Ref: 418

Keywords:  Break-even, Operating Leverage, Financial Leverage, Combined Leverage

Learning Obj.:  L.O. 12.3

AACSB:  Analytical Thinking

 

Learning Objective 12.4

 

1) Raising funds internally is effectively increasing the investment of the firm's existing common shareholders.

Answer:  TRUE

Diff: 1      Page Ref: 427

Keywords:  Internal Financing, Shareholders

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

2) Capital structure is equal to financial structure minus current liabilities.

Answer:  TRUE

Diff: 1      Page Ref: 420

Keywords:  Capital Structure, Financial Structure

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

3) The optimal capital structure occurs when operating leverage equals financial leverage.

Answer:  FALSE

Diff: 1      Page Ref: 422

Keywords:  Optimal Capital Structure

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

4) Higher bankruptcy costs will result in optimal capital structures using more long-term debt financing.

Answer:  FALSE

Diff: 2      Page Ref: 422

Keywords:  Bankruptcy Costs, Optimal Capital Structure

Learning Obj.:  L.O. 12.4

AACSB:  Analytical Thinking

 

5) Financial structure includes long- and short-term sources of funds.

Answer:  TRUE

Diff: 2      Page Ref: 421

Keywords:  Financial Structure

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

6) According to the moderate view of capital structure theory, the cost of common equity is constant regardless of the debt financing level.

Answer:  FALSE

Diff: 2      Page Ref: 424

Keywords:  Capital Structure Theory

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

7) The objective of capital structure management is to maximize the market value of the firm's common stock.

Answer:  TRUE

Diff: 2      Page Ref: 420

Keywords:  Capital Structure Management

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

8) The independence hypothesis suggests that the total market value of the firm's outstanding securities is unaffected by its capital structure.

Answer:  TRUE

Diff: 2      Page Ref: 422

Keywords:  Independence Hypothesis, Capital Structure

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

9) The moderate view of capital structure theory allows for the tax-deductibility of interest expense.

Answer:  TRUE

Diff: 2      Page Ref: 424

Keywords:  Capital Structure Theory, Tax-deductible Interest

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

10) Other things the same, the use of debt financing reduces the firm's total tax bill resulting in a higher total market value.

Answer:  TRUE

Diff: 2      Page Ref: 424

Keywords:  Debt Financing, Interest Tax Shield

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

11) The tax shield on interest is calculated by multiplying the interest rate paid on debt by the principal amount of the debt and the firm's marginal tax rate.

Answer:  TRUE

Diff: 2      Page Ref: 425

Keywords:  Interest Tax Shield

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

12) A firm's cost of capital is not affected by the composition of the right-hand side of the firm's balance sheet, but rather is determined by the firm's mix of assets.

Answer:  FALSE

Diff: 1      Page Ref: 421

Keywords:  Capital Structure

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

13) Financial structure is another term for capital structure.

Answer:  FALSE

Diff: 1      Page Ref: 420, 421

Keywords:  Capital Structure, Financial Structure

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

14) Financial structure is equal to non-interest bearing liabilities, such as accounts payable and accruals, plus capital structure, which includes short- and long-term debt, preferred stock, and common equity.

Answer:  TRUE

Diff: 1      Page Ref: 420

Keywords:  Capital Structure, Financial Structure

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

15) Two key components of a prudent capital structure are the debt maturity composition and the debt to equity composition.

Answer:  TRUE

Diff: 1      Page Ref: 421

Keywords:  Capital Structure, Debt Maturity Composition, Debt-Equity Composition

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

16) Borrowing funds using short-term debt, such as commercial paper, and using the proceeds to invest in long-term investments, creates a refinancing risk that can force firms to sell assets at distressed prices if financing becomes unavailable.

Answer:  TRUE

Diff: 2      Page Ref: 422

Keywords:  Debt Maturity Composition, Capital Structure

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

17) Corporations that are heavily committed to investments in fixed assets that are expected to produce cash flow over many years generally favor long-term debt to the extent that they borrow.

Answer:  TRUE

Diff: 1      Page Ref: 422

Keywords:  Debt Maturity Composition, Capital Structure

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

18) A saucer-shaped or U-shaped weighted average cost of capital curve results from the tax deductibility of interest, which results in the downward slope, followed by the recognition of potential financial distress costs, that cause the upward slope as the amount of debt ratio increases.

Answer:  TRUE

Diff: 2      Page Ref: 426

Keywords:  U-Shaped WACC Curve, Interest Deductibility, Financial Distress Costs

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

19) A corporation's debt capacity is the maximum proportion of debt that the corporation can include in its capital structure and still maintain its lowest composite cost of capital.

Answer:  TRUE

Diff: 1      Page Ref: 426

Keywords:  Debt Capacity, Optimal Range of Financial Leverage

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

20) The independence hypothesis allows for bankruptcy and agency costs.

Answer:  FALSE

Diff: 2      Page Ref: 422

Keywords:  Independence Hypothesis, Bankruptcy Costs, Agency Costs

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

21) The independence hypothesis suggests that the cost of equity decreases as financial leverage increases.

Answer:  FALSE

Diff: 2      Page Ref: 422

Keywords:  Independence Hypothesis, Cost of Equity, Financial Leverage

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

22) If we ignore bankruptcy and agency costs then the optimal capital structure for a firm under the moderate view would be 100% debt.

Answer:  TRUE

Diff: 2      Page Ref: 426

Keywords:  Optimal Capital Structure, Capital Structure Theory, Bankruptcy Costs, Agency Costs

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

23) The implicit cost of debt takes into consideration the change in the cost of common equity brought on by using additional debt.

Answer:  TRUE

Diff: 2      Page Ref: 426

Keywords:  Implicit Cost of Debt

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

24) The control hypothesis suggests that shareholders prefer an increase in the firm's debt in order to reduce the agency costs associated with excessive free cash flow.

Answer:  TRUE

Diff: 1      Page Ref: 428

Keywords:  Control Hypothesis, Agency Costs

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

25) Capital structure is the mix of the long-term sources of funds used by the firm.

Answer:  TRUE

Diff: 2      Page Ref: 422

Keywords:  Capital Structure

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

26) The optimal capital structure is the funds mix that will

  1. A) minimize the use of debt.
  2. B) achieve an equal proportion of debt, preferred stock, and common equity.
  3. C) minimize the firm's composite cost of capital.
  4. D) maximize total leverage.

Answer:  C

Diff: 1      Page Ref: 422

Keywords:  Optimal Capital Structure

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

 

27) The Modigliani and Miller hypothesis suggests that capital structure doesn't matter. All of the following conditions need to be met for this hypothesis to be true EXCEPT

  1. A) corporate income is not subject to taxation.
  2. B) capital structure consists only of stocks and bonds.
  3. C) securities are traded in perfect or efficient markets.
  4. D) all corporate net income is paid out as dividends.

Answer:  D

Diff: 1      Page Ref: 422

Keywords:  Capital Structure, Modigliani and Miller Hypothesis

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

28) Assuming no corporate taxes, the independence hypothesis suggests that a firm's weighted average cost of capital will

  1. A) remain constant regardless of capital structure because the cost of debt and the cost of equity are the same.
  2. B) remain constant because the cost of equity will be increasing as the amount of debt increases due to the increased risk.
  3. C) increase proportionally with the increase in the amount of debt a firm uses.
  4. D) decrease proportionally with the increase in the amount of debt a firm uses.

Answer:  B

Diff: 1      Page Ref: 423

Keywords:  Independence Hypothesis, Weighted Average Cost of Capital

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

29) Which of the following statements is MOST correct concerning a corporation's optimal capital structure?

  1. A) The optimal capital structure maximizes the present value of the interest tax shield.
  2. B) The optimal capital structure occurs at the point where the market value of the levered firm is maximized.
  3. C) The optimal capital structure minimizes the present value of financial distress costs and agency costs.
  4. D) The optimal capital structure occurs where the present value of the interest tax shield equals the present value of the firm's bankruptcy costs.

Answer:  B

Diff: 2      Page Ref: 422

Keywords:  Optimal Capital Structure, Interest Tax Shield, Financial Distress Costs, Agency Costs

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

 

30) One component of a firm's financial structure which is NOT a component of its capital structure is

  1. A) common stock.
  2. B) accounts payable.
  3. C) long-term debt.
  4. D) preferred stock.

Answer:  B

Diff: 2      Page Ref: 420, 421

Keywords:  Capital Structure, Financial Structure

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

31) According to the moderate view of capital costs and financial leverage, as the use of debt financing increases,

  1. A) the cost of capital continuously decreases.
  2. B) the cost of capital remains constant.
  3. C) the cost of capital continuously increases.
  4. D) there is an optimal level of debt financing.

Answer:  D

Diff: 2      Page Ref: 422

Keywords:  Capital Structure Theory, Optimal Capital Structure

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

32) When deciding upon how much debt financing to employ, most practitioners would cite which of the following as the most important influence on the level of the debt ratio?

  1. A) providing a borrowing reserve
  2. B) maintaining desired bond rating
  3. C) ability to adequately meet financing charges
  4. D) exploiting advantages of financial leverage

Answer:  C

Diff: 3      Page Ref: 422

Keywords:  Debt Ratio, Capital Structure

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

33) Optimal capital structure is

  1. A) the mix of permanent sources of funds used by the firm in a manner that will maximize the company's common stock price.
  2. B) the mix of all items that appear on the right-hand side of the company's balance sheet.
  3. C) the mix of funds that will minimize the firm's cost of equity capital.
  4. D) the mix of funds that will maximize the firm's interest tax shield.

Answer:  A

Diff: 2      Page Ref: 422

Keywords:  Optimal Capital Structure

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

 

34) Which of the following would NOT be a part of a firm's capital structure?

  1. A) short-term notes payable
  2. B) long-term bonds
  3. C) preferred stock
  4. D) common stock

Answer:  A

Diff: 1      Page Ref: 421

Keywords:  Capital Structure

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

35) A firm's optimal capital structure occurs where?

  1. A) EPS are maximized, and WACC is minimized.
  2. B) Stock price is maximized, and EPS are maximized.
  3. C) Stock price is maximized, and WACC is maximized.
  4. D) WACC is minimized, and stock price is maximized.

Answer:  D

Diff: 2      Page Ref: 422

Keywords:  Optimal Capital Structure

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

36) Which of the following would be considered the firm's optimal capital structure?

  1. A) Stock Price = $25, Earnings Per Share = $10, Cost of Equity Capital = 15%
  2. B) Stock Price = $23, Earnings Per Share = $11, Cost of Equity Capital = 18%
  3. C) Stock Price = $24, Earnings Per Share = $12, Cost of Equity Capital = 17%
  4. D) Stock Price = $20, Earnings Per Share = $12, Cost of Equity Capital = 20%

Answer:  A

Diff: 1      Page Ref: 422

Keywords:  Optimal Capital Structure, Maximize Shareholder Value

Learning Obj.:  L.O. 12.4

AACSB:  Analytical Thinking

 

37) The market value of a leveraged firm is equal to the market value of an unleveraged firm

  1. A) plus the present value of tax shields minus the present value of financial distress costs plus the present value of agency costs.
  2. B) plus the present value of tax shields plus the present value of financial distress costs plus the present value of agency costs.
  3. C) minus the present value of tax shields minus the present value of financial distress costs minus the present value of agency costs.
  4. D) plus the present value of tax shields minus the present value of financial distress costs minus the present value of agency costs.

Answer:  D

Diff: 2      Page Ref: 426

Keywords:  Leverage, Distress Costs, Tax Shields, Agency Costs

Learning Obj.:  L.O. 12.4

AACSB:  Analytical Thinking

 

 

38) The "threat hypothesis"

  1. A) reduces management's tendency to spend freely.
  2. B) encourages management to use debt to further their own interests.
  3. C) increases the agency problem.
  4. D) increases agency monitoring costs.

Answer:  A

Diff: 1      Page Ref: 428

Keywords:  Threat Hypothesis, Agency Costs

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

39) How do agency costs and free cash flow relate to capital structure management?

Answer:  Agency problems stem from conflicts of interest, and capital structure management gives rise to a natural conflict between stockholders and bondholders. To reduce this conflict of interest, the creditors (bond investors) and stockholders may agree to include several protective covenants in the bond contract. These bond covenants may be thought of as restrictions on managerial decision making. The increase in agency costs will raise the implicit cost (the true total cost) of debt financing.

The "free cash flow" concept of cash flow in excess of that required to fund all projects that have positive net present values when discounted at the relevant cost of capital is also related to capital structure management.

Substantial free cash flow can lead to misbehavior by managers and poor decisions that are not in the best interests of the firm's common stockholders. In other words, managers have an incentive to hold onto the free cash flow and have "fun" with it, rather than "disgorge" it, say, in the form of higher cash dividend payments.  This leads to the "control hypothesis" for using debt. By leveraging up (taking on debt) the firm's shareholders will enjoy increased control over their management team.

We can also refer to this motive for financial leverage use as the "threat hypothesis." Managers work under the threat of financial failure; therefore, according to the "free cash flow theory of capital structure," they work more efficiently. This is supposed to reduce the agency costs of free cash flow, which will in turn be recognized by the marketplace in the form of greater returns on the common stock.

Diff: 1      Page Ref: 427, 428

Keywords:  Capital Structure Management

Learning Obj.:  L.O. 12.4

AACSB:  Reflective Thinking

 

Learning Objective 12.5

 

1) Given taxes and bankruptcy costs exist, as financial leverage increases, the weighted average cost of capital first decreases and then increases.

Answer:  TRUE

Diff: 1      Page Ref: 429

Keywords:  Weighted Average Cost of Capital, Taxes, Bankruptcy Costs, Moderate View

Learning Obj.:  L.O. 12.5

AACSB:  Analytical Thinking

 

 

2) The EBIT-EPS indifference point is the level of production at which the company's EBIT equals its EPS.

Answer:  FALSE

Diff: 1      Page Ref: 431

Keywords:  EBIT-EPS Indifference Point

Learning Obj.:  L.O. 12.5

AACSB:  Reflective Thinking

 

3) An EBIT-EPS analysis allows the decision maker to visualize the impact of different financing plans on EPS over a range of EBIT levels.

Answer:  TRUE

Diff: 2      Page Ref: 429

Keywords:  EBIT-EPS Analysis

Learning Obj.:  L.O. 12.5

AACSB:  Reflective Thinking

4) Because there are no fixed financing costs, a common stock plan line in an EBIT-EPS analysis chart will have a less-steep slope than will a bond plan line.

Answer:  TRUE

Diff: 2      Page Ref: 429

Keywords:  EBIT-EPS Analysis

Learning Obj.:  L.O. 12.5

AACSB:  Reflective Thinking

 

5) One danger of EBIT-EPS analysis is that it ignores the implicit cost of debt financing.

Answer:  TRUE

Diff: 2      Page Ref: 429

Keywords:  EBIT-EPS Analysis

Learning Obj.:  L.O. 12.5

AACSB:  Reflective Thinking

 

6) Above the EBIT-EPS indifference point, a more heavily levered financial plan will produce greater EPS.

Answer:  TRUE

Diff: 2      Page Ref: 429

Keywords:  EBIT-EPS Indifference Point

Learning Obj.:  L.O. 12.5

AACSB:  Reflective Thinking

 

7) The Modigliani and Miller hypothesis does NOT work in the "real world" because

  1. A) interest expense is tax deductible, providing an advantage to debt financing.
  2. B) higher levels of debt increase the likelihood of bankruptcy, and bankruptcy has real costs for any corporation.
  3. C) dividend payments are fixed and tax deductible for the corporation.
  4. D) both A and B

Answer:  D

Diff: 1      Page Ref: 422

Keywords:  Modigliani and Miller Hypothesis, Taxes, Bankruptcy Costs

Learning Obj.:  L.O. 12.5

AACSB:  Reflective Thinking

 

 

8) When using an EPS-EBIT chart to evaluate a pure debt financing and pure equity financing plan,

  1. A) the debt financing plan line will graph with a steeper slope than the equity financing plan line.
  2. B) the debt financing plan line will have a lower level of EBIT at EPS = 0.
  3. C) the line of the two financing plans will intersect on the EBIT axis.
  4. D) the slope of the equity financing plan line will be steeper than the debt financing plan line below the intersection of the two lines.

Answer:  A

Diff: 3      Page Ref: 431

Keywords:  EPS-EBIT Chart

Learning Obj.:  L.O. 12.5

AACSB:  Analytical Thinking

9) The primary weakness of EBIT-EPS analysis is that

  1. A) it ignores the implicit cost of debt financing.
  2. B) it double counts the cost of debt financing.
  3. C) it applies only to firms with large amounts of debt in their capital structure.
  4. D) it may only be used by firms that are profitable this year.

Answer:  A

Diff: 3      Page Ref: 432

Keywords:  EBIT-EPS Analysis

Learning Obj.:  L.O. 12.5

AACSB:  Reflective Thinking

 

10) Basic tools of capital-structure management include

  1. A) EBIT-EPS analysis.
  2. B) comparative leverage ratios.
  3. C) capital budgeting techniques.
  4. D) both A and B.

Answer:  D

Diff: 2      Page Ref: 429, 431

Keywords:  Capital-Structure Management, EBIT-EPS Analysis, Comparative Leverage Ratios

Learning Obj.:  L.O. 12.5

AACSB:  Reflective Thinking

 

11) The EBIT-EPS indifference point

  1. A) identifies the EBIT level at which the EPS will be the same regardless of the financing plan.
  2. B) identifies the point at which the analysis can use EBIT and EPS interchangeably.
  3. C) identifies the level of earnings at which the management is indifferent about the payments of dividends.
  4. D) identifies the sales level at which EBIT equals EPS.

Answer:  A

Diff: 2      Page Ref: 429

Keywords:  EBIT-EPS Indifference Point

Learning Obj.:  L.O. 12.5

AACSB:  Reflective Thinking

 

12) Balon Plastics, Inc. is trying to decide how best to finance a proposed $10,000,000 capital investment. Under Plan I, the project will be financed entirely with long-term 9 percent bonds. The firm currently has no debt or preferred stock. Under Plan II, common stock will be sold to net the firm $20 a share; presently, 1,000,000 shares are outstanding. The corporate tax rate for Balon is 40 percent.

  1. Calculate the indifference level of EBIT associated with the two financing plans.
  2. Prepare an EBIT-EPS analysis chart, showing the intersection of the two financing plan lines.
  3. Which financing plan would you expect to cause the greatest change in EPS relative to a change in EBIT? Why?
  4. If EBIT is expected to be $3.1 million, which plan will result in a higher EPS?

Answer: 

  1. (EBIT)(1 - 0.4)/1,500,000 = (EBIT - $900,000)(1 - 0.4)/1,000,000

        EBIT = $2,700,000

 

  1. GRAPH SHOULD BE DRAWN BY STUDENT

 

  1. The bond plan will magnify changes in EPS since it increases financial leverage.

 

  1. Since $3.1 million EBIT is above the indifference point of $2.7 million, the bond plan will give a higher EPS.

Diff: 3      Page Ref: 429

Keywords:  EBIT-EPS Analysis, Indifference Point

Learning Obj.:  L.O. 12.5

AACSB:  Analytical Thinking

 

13) Balon Plastics, Inc. is financed entirely with 3 million shares of common stock selling for $20 a share. Capital of $4 million is needed for this year's capital budget. Additional funds can be raised with new stock (ignore dilution) or with 13 percent 10-year bonds. The firm's tax rate is 40 percent.

  1. Calculate the financing plan's EBIT indifference point.
  2. The expected level of EBIT is $10,320,000 with a standard deviation of $2,000,000. What is the probability that EBIT will be above the indifference point?
  3. Does the "indifference point" calculated in question (a) above truly represent a point where stockholders are indifferent between stock and debt financing? Explain your answer.

Answer: 

  1. (EBIT - 0)(1 - 0.4)/3,200,000 = (EBIT - 520,000)(1 - 0.4)/3,000,000

       EBIT = $8,320,000

 

  1. Z = (8.32 - 10.32)/2 = 1.00 to the left of the mean

       P(EBIT ≥ $8.32 million) = 1 - 0.16 = 0.84

 

  1. No. Financial risk is ignored.

Diff: 3      Page Ref: 429

Keywords:  EBIT-EPS Analysis, Indifference Point

Learning Obj.:  L.O. 12.5

AACSB:  Analytical Thinking

 

14) The MAX Corporation is planning a $4,000,000 expansion this year. The expansion can be financed by issuing either common stock or bonds. The new common stock can be sold for $60 per share. The bonds can be issued with a 12 percent coupon rate. The firm's existing shares of preferred stock pay dividends of $2.00 per share. The company's corporate income tax rate is 46 percent. The company's balance sheet prior to expansion is as follows:

 

                       MAX Corporation

Current Assets

$2,000,000

Fixed Assets

8,000,000

Total Assets

$10,000,000

Current Liabilities

$1,500,000

Bonds:

 

(8%, $1,000 par value)

1,000,000

(10%, $1,000 par value)

4,000,000

Preferred Stock:

 

($100 par value)

$500,000

Common Stock:

 

($2 par value)

700,000

Retained Earnings

2,300,000

Total Liabilities and Equity

$10,000,000

 

  1. Calculate the indifference level of EBIT between the two plans.
  2. If EBIT is expected to be $3 million, which plan will result in higher EPS?

Answer: 

  1. EPS: Stock Plan EPS: Bond Plan

 

   

 

  

 

  (350,000)[EBIT(.54) - $269,200] = (416,667)[EBIT(.54) - $528,400]

(189,000)EBIT - $94,220,000,000 = (225,000)EBIT - $220,000,000,000

                                (36,000)EBIT = $125,780,000,000

                                              EBIT = $3,493,889

  1. EPS: Stock Plan

  =  = 3.24 

 

       EPS:  Bond Plan

    =  = $3.12

Stock plan has higher EPS.

Diff: 3      Page Ref: 429

Keywords:  EBIT-EPS Analysis, Indifference Point, EPS

Learning Obj.:  L.O. 12.5

AACSB:  Analytical Thinking

15) Sunshine Candy Company's capital structure for the past year of operation is shown below.

 

First mortgage bonds at 12%           $2,000,000

Debentures at 15%                               1,500,000

Common stock (1,000,000 shares)     5,000,000

Retained earnings                                   500,000

TOTAL                                                $9,000,000

 

The federal tax rate is 50 percent. Sunshine Candy Company, home-based in Orlando, wants to raise an additional $1,000,000 to open new facilities in Tampa and Miami. The firm can accomplish this via two alternatives: (1) It can sell a new issue of 20-year debentures with 16 percent interest; or (2) 20,000 new shares of common stock can be sold to the public to net the candy company $50 per share. A recent study, performed by an outside consulting organization, projected Sunshine Candy Company's long-term EBIT level at approximately $6,800,000. Find the indifference level of EBIT (with regard to earnings per share) between the suggested financing plans.

Answer:  

 = 

 

 = 

 

50 EBIT - 23,250,000 = 51 EBIT - 31,875,000

 

EBIT = $8,625,000 is the indifference level

Diff: 2      Page Ref: 429

Keywords:  EBIT-EPS Analysis, Indifference Point

Learning Obj.:  L.O. 12.5

AACSB:  Analytical Thinking

 

 

16) Premium Lodging, Inc., is financed entirely with 3 million shares of common stock selling for $50 a share. Capital of $10 million is needed for this year's capital budget. Additional funds can be raised with new stock (ignore dilution) or with 11 percent 12-year bonds. Premium Lodging's tax rate is 35 percent.

Calculate the financing plan's EBIT indifference point.

Answer:  

 = 

EBIT = $17,600,000 is the indifference level

Diff: 3      Page Ref: 429

Keywords:  EBIT-EPS Analysis, Indifference Point

Learning Obj.:  L.O. 12.5

AACSB:  Analytical Thinking

17) Identify several factors that influence the decision to issue debt.

Answer: 

Financial Flexibility  When a firm needs to raise additional funds, its bargaining position is better if it has options or choices.

Credit Rating  Dropping a notch in the rating system leads to an increase in the firm's borrowing costs, so managers like to avoid this problem if at all possible.

Insufficient Internal Funds  It has long been known that firms tend to follow a priority list when raising new funds that has been referred to as a "pecking order." The order in which firms typically finance their operations begins with internally generated profits, followed by debt financing, and, finally, by issuing new equity.

Level of Interest Rates  Other things being the same, firms prefer to borrow when they feel interest rates are low relative to their expectations.

Interest Tax Savings  Interest expense, unlike dividends paid to shareholders, is a tax-deductible expense. This tax-savings feature serves as a subsidy to corporate borrowing and makes debt appear cheap relative to alternative sources of financing.

Transaction Costs and Fees  When a firm chooses between debt and equity, it faces very different costs of issuing the two types of securities. The differentially higher costs of issuing equity make it less attractive as a source of financing.

Equity Undervaluation/Overvaluation  Earlier we mentioned that CFOs often try to time their debt offerings to take advantage of abnormally low interest rates. The same holds true for equity offerings.

Comparable Firm Debt Levels  Firms in similar businesses tend to have similar capital structures. This is made doubly important by virtue of the fact that lenders and credit rating agencies often compare a firm's debt ratios to those of comparable firms when deciding credit terms and ratings.

Bankruptcy/Distress Costs  The more debt a firm has used in the past, the higher the likelihood is that the firm will at some point face financial distress and possibly fail. This risk forms the basis for the firm's credit rating.

Customer/Supplier Discomfort  An important source of financial distress brought on by the use of debt financing comes in the form of pressures from both the firm's customers (who fear that financial distress may interrupt their source of supply) and the firm's suppliers (who fear that financial distress may interrupt an important source of demand for their goods and services). The latter is compounded further if the supplier has provided the firm with trade credit, which is at risk if the firm fails.

Diff: 2      Page Ref: 434, 435

Keywords:  Capital Structure Management

Learning Obj.:  L.O. 12.5

AACSB:  Reflective Thinking

 

 

 

 

 

 

 

 

 

 -----

Key Contents: Financial Management and Corporate Finance
------
Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University
Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business, University of Western Ontario
Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown
International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick, Columbia University
------
Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Corporate Finance: The Core, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Excel Modeling in Corporate Finance, 5th Edition, 2015, Craig W. Holden, Indiana University
Fundamentals of Corporate Finance, 3rd Edition, 2015, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University, Jarrad Harford, University of Washington

-----

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017
Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016
Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University
Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown, Virginia Polytechnic Instit. and State University
Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin
Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter
------
Part 1: Fundamental Concepts and Basic Tools of Finance
1. Financial Management
2. Financial Statements
3. The Time Value of Money (Part 1)
4. The Time Value of Money (Part 2)
5. Interest Rates
Part 2: Valuing Stocks and Bonds and Understanding Risk and Return
6. Financial Management Bonds and Bond Valuation
7. Stocks and Stock Valuation
8. Risk and Return
Part 3: Capital Budgeting
9: Capital Budgeting Decision Models
10: Cash Flow Estimation
11: The Cost of Capital
Part 4: Financial Planning and Evaluating Performance
12. Forecasting and Short-Term Financial Planning
13. Working Capital Management
14. Financial Ratios and Firm Performance
Part 5: Other Selected Finance Topics
15. Raising Capital
16. Capital Structure
17. Dividends, Dividend Policy, and Stock Splits
18. International Financial Management
Appendix 1 Future Value Interest Factors
Appendix 2 Present Value Interest Factors
Appendix 3 Future Value Interest Factors of an Annuity
Appendix 4 Present Value Interest Factors of an Annuity
Appendix 5 Answers to Prepping for Exam Questions
------
1. Overview of Financial Management
2. Sizing Up a Business: A Non-Financial Perspective
3. Understanding Financial Statements
4. Measuring Financial Performance
5. Managing Day-To-Day Cash Flow
6. Projecting Financial Requirements and Managing Growth
7. Time Value of Money Basics and Applications
8. Making Investment Decisions
9. Overview of Capital Markets: Long-Term Financing Instruments
10. Assessing the Cost of Capital: What Investors Require
11. Understanding Financing and Payout Decisions
12. Designing an Optimal Capital Structure
13. Measuring and Creating Value
14. Comprehensive Case Study: Wal-Mart Stores, Inc.

1. Overview of Financial Management
• 1.1: Financial Management and the Cash Flow Cycle
• 1.2: The Role of Financial Managers
• 1.3: A Non-Financial Perspective of Financial Management
• 1.4: Financial Management’s Relationship with Accounting and Other Disciplines
• 1.5: Types of Firms
• 1.6: A Financial Management Framework
• 1.7: Relevance for Managers
• 1.8: Summary
• 1.9: Additional Readings
• 1.10: End of Chapter Problems
2. Sizing Up a Business: A Non-Financial Perspective
• 2.1: Sizing Up The Overall Economy
o 2.1.1: GDP Components
o 2.1.2: Sector-Related Fluctuations
o 2.1.3: Inflation and Interest Rates
o 2.1.4: Capital Markets
o 2.1.5: Economic Size-Up Checklist
• 2.2: Sizing Up the Industry
o 2.2.1: Industry Life Cycles
o 2.2.2: The Competitive Environment
o 2.2.3: Opportunities and Risks
o 2.2.4: Industry Size-up Checklist
• 2.3: Sizing Up Operations Management and Supply Risk
• 2.4: Sizing Up Marketing Management and Demand Risk
• 2.5: Sizing Up Human Resource Management and Strategy
• 2.6: Sizing Up Home Depot: An Example
• 2.7: Relevance for Managers
• 2.8 Summary
• 2.9: Additional Readings and Information
• 2.10: End of Chapter Problems
3. Understanding Financial Statements
• 3.1: Understanding Balance Sheets
o 3.1.1: Understanding Assets
o 3.1.2: Understanding Liabilities
o 3.1.3: Understanding Equity
• 3.2: Understanding Income Statements
o 3.2.1: Understanding Revenues, Costs, Expenses, and Profits
o 3.2.2: Connecting a Firm’s Income Statement and Balance Sheet
• 3.3: Understanding Cash Flow Statements
o 3.3.1: Cash Flows Related to Operating Activities
o 3.3.2: Cash Flows from Investing Activities
o 3.3.3: Cash Flows from Financing Activities
• 3.4: Relevance for Managers
• 3.5: Summary
• 3.6: Additional Readings and Sources of Information
• 3.7: End of Chapter Problems
4. Measuring Financial Performance
• 4.1: Performance Measures
o 4.1.1: Return on Equity
o 4.1.2: Profitability Measures
o 4.1.3: Resource Management Measures
o 4.1.4: Liquidity Measures
o 4.1.5: Leverage Measures
o 4.1.6: Application: Home Depot
• 4.2: Reading Annual Reports
• 4.3: Relevance for Managers
• 4.4: Summary
• 4.5: Additional Readings and Sources of Information
• 4.6: End of Chapter Problems
5. Managing Day-To-Day Cash Flow
• 5.1: Cash Flow Cycles
• 5.2: Working Capital Management
o 5.2.1: Managing Inventory
o 5.2.2: Managing Accounts Receivable
o 5.2.3: Managing Accounts Payable
o 5.2.4: Application: Home Depot
• 5.2.4.1: Orange Computers and Little Orange Computers
• 5.2.4.2: Home Depot
• 5.3: Short-Term Financing
o 5.3.1: Bank Loans
o 5.3.2: Commercial Paper
o 5.3.3: Banker’s Acceptance
• 5.4: Relevance for Managers
• 5.5: Summary
• 5.6: Additional Readings
• 5.7: End of Chapter Problems

6. Projecting Financial Requirements and Managing Growth
• 6.1: Generating Pro Forma Income Statements
o 6.1.1: Establishing the Cost of Goods Sold and Gross Profit
o 6.1.2: Establishing Expenses
o 6.1.3: Establishing Earnings
• 6.2: Generating Pro Forma Balance Sheets
o 6.2.1: Establishing Assets
o 6.2.2: Establishing Liabilities and Equity
• 6.3: Generating Pro Forma Cash Budgets
o 6.3.1: Establishing Cash Inflows
o 6.3.2: Establishing Cash Outflows
o 6.3.3: Establishing Net Cash Flows
• 6.4: Performing Sensitivity Analysis
o 6.4.1: Sales Sensitivity
o 6.4.1: Interest Rate Sensitivity
o 6.4.3: Working Capital Sensitivity
• 6.5: Understanding Sustainable Growth and Managing Growth
• 6.6: Relevance for Managers
• 6.7: Summary
• 6.8: Additional Readings and Resources
• 6.9: Problems

7. Time Value of Money Basics and Applications
• 7.1: Exploring Time Value of Money Concepts
o 7.1.1: Future Values
o 7.1.2: Present Values
o 7.1.3: Annuities
o 7.1.4: Perpetuities
• 7.2: Applying Time Value of Money Concepts to Financial Securities
o 7.2.1: Bonds
o 7.2.2: Preferred Shares
o 7.2.3: Common Equity
• 7.3: Relevance for Managers
• 7.4: Summary
• 7.5: Additional Readings
• 7.6: End of Chapter Problems

8. Making Investment Decisions
• 8.1: Understanding the Decision-Making Process
• 8.2: Capital Budgeting Techniques
o 8.2.1: Payback
• 8.2.1.1: Strengths and Weaknesses of the Payback Method
o 8.2.2: Net Present Value
• 8.2.2.1: Strengths and Weaknesses of the Net Present Value Method
o 8.2.3: Internal Rate of Return
• 8.2.3.1: Strengths and Weaknesses of the Internal Rate of Return Method
• 8.2.3.2: Modified Internal Rate of Return
• 8.3: Capital Budgeting Extensions
o 8.3.1: Profitability Index
o 8.3.2: Equivalent Annual Cost and Project Lengths
o 8.3.3: Mutually Exclusive Projects and Capital Rationing
• 8.4: Relevance for Managers
• 8.5: Summary
• 8.6: Additional Readings
• 8.7: End of Chapter Problems

9. Overview of Capital Markets: Long-Term Financing Instruments
• 9.1: Bonds
o 9.1.1: Changing Bond Yields
o 9.1.2: Bond Features
o 9.1.3: Bond Ratings
• 9.2: Preferred Shares
• 9.3: Common Shares
o 9.3.1: Historical Returns
• 9.4: Capital Markets Overview
o 9.4.1: Private versus Public Markets
o 9.4.2: Venture Capital and Private Equity
o 9.4.3: Initial Offerings versus Seasoned Issues
o 9.4.4: Organized Exchanges versus Over-The-Counter Markets
o 9.4.5: Role of Intermediaries
• 9.5: Market Efficiency
o 9.5.1: Weak Form
o 9.5.2: Semi-strong Form
o 9.5.3: Strong Form
o 9.5.4: U.S. Stock Market Efficiency
• 9.6: Relevance for Managers
• Appendix: Understanding Bond and Stock Investment Information
• 9.7: Summary
• 9.8: Additional Readings
• 9.9: End of Chapter Problems

10. Assessing the Cost of Capital: What Investors Require
• 10.1: Understanding the Cost of Capital: An Example
• 10.2: Understanding the Implications of the Cost of Capital
• 10.3: Defining Risk
• 10.4: Estimating the Cost of Debt
• 10.5: Estimating the Cost of Preferred Shares
• 10.6: Estimating the Cost of Equity
o 10.6.1: Dividend Model Approach
o 10.6.2: Capital Asset Pricing Model
• 10.6.2.1: Risk-Free Rate
• 10.6.2.2: Market Risk Premium
• 10.6.2.3: Beta
• 10.7: Estimating Component Weights
• 10.8: Home Depot Application
• 10.9: Hurdle Rates
• 10.10: Relevance for Managers
• 10.11: Summary
• 10.12: Additional Readings
• 10.13: Problems
11. Understanding Financing and Payout Decisions
• 11.1: Capital Structure Overview
• 11.2: Understanding the Modigliani-Miller Argument: Why Capital Structure Does Not Matter
• 11.3: Relaxing the Assumptions: Why Capital Structure Does Matter
o 11.3.1: Understanding the Impact of Corporate Taxes
o 11.3.2: Understanding the Impact of Financial Distress
o 11.3.3: Combining Corporate Taxes and Financial Distress Costs
o 11.3.4: Impact of Asymmetric Information
• 11.4: Understanding Payout Policies
o 11.4.1: Paying Dividends
o 11.4.2: Repurchasing Shares
o 11.4.3: Do Dividend Policies Matter?
• 11.5: Relevance for Managers
• 11.6: Summary
• 11.7: Additional Resources
• 11.8: End of Chapter Problems
• Appendix: Why Dividend Policy Doesn’t Matter: Example

12. Designing an Optimal Capital Structure
• 12.1: Factor Affecting Financing Decisions: The FIRST Approach
o 12.1.1: Maximizing Flexibility
o 12.1.2: Impact on EPS: Minimizing Cost
• 12.1.2.1: A Simple Valuation Model
• 12.1.2.2: Earnings before Interest and Taxes Break-Even: What Leverage Really Means
• 12.1.2.3: Does Issuing Equity Dilute the Value of Existing Shares?
o 12.1.3: Minimizing Risk
o 12.1.4: Maintaining Shareholder Control
o 12.1.5: Optimal Training
• 12.2: Tradeoff Assessment: Evaluating FIRST Criteria
• 12.3: Relevance for Managers
• 12.4: Summary
• 12.5: Additional Resource
• 12.6: End of Chapter Problems

13. Measuring and Creating Value
• 13.1: An Overview of Measuring and Creating Value
• 13.2: Measuring Value: The Book Value Plus Adjustments Method
o 13.2.1: Pros and Cons of the Book Value of Equity Plus Adjustments Method
• 13.3: Measuring Value: The Discount Cash Flow Analysis Method
o 13.3.1: Estimating Free Cash Flows
o 13.3.2: Estimating the Cost of Capital
o 13.3.3: Estimating the Present Value of Free Cash Flows
o 13.3.4: Estimating the Terminal Value
o 13.3.5: Estimating the Value of Equity
o 13.3.6: Pros and Cons of the Free Cash Flow to the Firm Approach
• 13.4: Measuring Value: Relative Valuations and Comparable Analysis
o 13.4.1: The Price-Earnings Method
• 13.4.1.1: Pros and Cons of the Price-Earnings Approach
o 13.4.2: The Enterprise Value-to-EBITDA Method
• 13.4.2.1: Pros and Cons of the EV/EBITDA Approach
• 13.5: Creating Value and Value-Based Management
• 13.6: Valuing Mergers and Acquisitions
o 13.6.1: Valuing Comparable M&A Transactions
• 13.7: Relevance for Managers
• 13.8: Summary
• 13.9: Additional Readings
• 13.10: End of Chapter Problems

14. Comprehensive Case Study: Wal-Mart Stores, Inc.
• 14.1: Sizing Up Wal-Mart
o 14.1.1: Analyzing the Economy
o 14.1.2: Analyzing the Industry
o 14.1.3: Analyzing Walmart’s Strengths and Weaknesses in Operations, Marketing, Management, and Strategy
• 14.1.3.1: Analyzing Walmart’s Operations
• 14.1.3.2: Analyzing Walmart’s Marketing
• 14.1.3.3: Analyzing Walmart’s Management and Strategy
o 14.1.4: Analyzing Walmart’s Financial Health
• 14.2: Projecting Walmart’s Future Performance
o 14.2.1: Projecting Walmart’s Income Statement
o 14.2.2: Projecting Walmart’s Balance Sheet
o 14.2.3: Examining Alternate Scenarios
• 14.3: Assessing Walmart’s Long-Term Investing and Financing
o 14.3.1: Assessing Walmart’s Investments
o 14.3.2: Assessing Walmart’s Capital Raising and the Cost of Capital
• 14.4: Valuing Walmart
o 14.4.1: Measuring Walmart’s Economic Value Added
o 14.4.2: Estimating Walmart’s Intrinsic Value: The DCF Approach
o 14.4.3: Estimating Walmart’s Intrinsic Value: Comparable Analysis
o 14.4.4: Creating Value and Overall Assessment of Walmart
• 14.5: Relevance for Managers and Final Comments
• 14.6: Additional Readings and Sources of Information
• 14.7: End of Chapter Problems
------
Part 1: Introduction to Financial Management
Chapter 1: Getting Started - Principles of Finance
Chapter 2: Firms and the Financial Market
Chapter 3: Understanding Financial Statements, Taxes, and Cash Flows
Chapter 4: Financial Analysis - Sizing Up Firm Performance
Part 2: Valuation of Financial Assets
Chapter 5: Time Value of Money - The Basics
Chapter 6: The Time Value of Money - Annuities and Other Topics
Chapter 7: An Introduction to Risk and Return - History of Financial Market Returns
Chapter 8: Risk and Return - Capital Market Theory
Chapter 9: Debt Valuation and Interest Rates
Chapter 10: Stock Valuation
Part 3: Capital Budgeting
Chapter 11: Investment Decision Criteria
Chapter 12: Analyzing Project Cash Flows
Chapter 13: Risk Analysis and Project Evaluation
Chapter 14: The Cost of Capital
Part 4: Capital Structure & Dividend Policy
Chapter 15: Capital Structure Policy
Chapter 16: Dividend Policy
Part 5: Liquidity Management & Special Topics in Finance
Chapter 17: Financial Forecasting and Planning
Chapter 18: Working Capital Management
Chapter 19: International Business Finance
Chapter 20: Corporate Risk Management
------
PART I: INTRODUCTION TO FOREIGN EXCHANGE MARKETS AND RISKS
Chapter 1: Globalization and the Multinational Corporation
Chapter 2: The Foreign Exchange Market
Chapter 3: Forward Markets and Transaction Exchange Risk
Chapter 4: The Balance of Payments
Chapter 5: Exchange Rate Systems
PART II: INTERNATIONAL PARITY CONDITIONS AND EXCHANGE RATE DETERMINATION
Chapter 6: Interest Rate Parity
Chapter 7: Speculation and Risk in the Foreign Exchange Market
Chapter 8: Purchasing Power Parity and Real Exchange Rates
Chapter 9: Measuring and Managing Real Exchange Risk
Chapter 10: Exchange Rate Determination and Forecasting

PART III: INTERNATIONAL CAPITAL MARKETS
Chapter 11: International Debt Financing
Chapter 12: International Equity Financing
Chapter 13: International Capital Market Equilibrium
Chapter 14: Political and Country Risk

PART IV: INTERNATIONAL CORPORATE FINANCE
Chapter 15: International Capital Budgeting
Chapter 16: Additional Topics in International Capital Budgeting
Chapter 17: Risk Management and the Foreign Currency Hedging Decision
Chapter 18: Financing International Trade
Chapter 19: Managing Net Working Capital

PART V: FOREIGN CURRENCY DERIVATIVES
Chapter 20: Foreign Currency Futures and Options
Chapter 21: Interest Rate and Foreign Currency Swaps
------
PART 1: INTRODUCTION
1. The Corporation
2. Introduction to Financial Statement Analysis
3. Financial Decision Making and the Law of One Price
PART 2: TIME, MONEY, AND INTEREST RATES
4. The Time Value of Money
5. Interest Rates
6. Valuing Bonds
PART 3: VALUING PROJECTS AND FIRMS
7. Investment Decision Rules
8. Fundamentals of Capital Budgeting
9. Valuing Stocks
PART 4: RISK AND RETURN
10. Capital Markets and the Pricing of Risk
11. Optimal Portfolio Choice and the Capital Asset Pricing Model
12. Estimating the Cost of Capital
13. Investor Behavior and Capital Market Efficiency
PART 5: CAPITAL STRUCTURE
14. Capital Structure in a Perfect Market
15. Debt and Taxes
16. Financial Distress, Managerial Incentives, and Information
17. Payout Policy
PART 6: ADVANCED VALUATION
18. Capital Budgeting and Valuation with Leverage
19. Valuation and Financial Modeling: A Case Study
PART 7: OPTIONS
20. Financial Options
21. Option Valuation
22. Real Options

PART 8: LONG-TERM FINANCING
23. Raising Equity Capital
24. Debt Financing
25. Leasing
PART 9: SHORT-TERM FINANCING
26. Working Capital Management
27. Short-Term Financial Planning
PART 10: SPECIAL TOPICS
28. Mergers and Acquisitions
29. Corporate Governance
30. Risk Management
31. International Corporate Finance
------
PART 1: INTRODUCTION
1. The Corporation
2. Introduction to Financial Statement Analysis
3. Financial Decision Making and the Law of One Price
PART 2: TIME, MONEY, AND INTEREST RATES
4. The Time Value of Money
5. Interest Rates
6. Valuing Bonds
PART 3: VALUING PROJECTS AND FIRMS
7. Investment Decision Rules
8. Fundamentals of Capital Budgeting
9. Valuing Stocks
PART 4: RISK AND RETURN
10. Capital Markets and the Pricing of Risk
11. Optimal Portfolio Choice and the Capital Asset Pricing Model
12. Estimating the Cost of Capital
13. Investor Behavior and Capital Market Efficiency
PART 5: CAPITAL STRUCTURE
14. Capital Structure in a Perfect Market
15. Debt and Taxes
16. Financial Distress, Managerial Incentives, and Information
17. Payout Policy
PART 6: ADVANCED VALUATION
18. Capital Budgeting and Valuation with Leverage
19. Valuation and Financial Modeling: A Case Study
------
------
PART 1 INTRODUCTION
Chapter 1 Corporate Finance and the Financial Manager
Chapter 2 Introduction to Financial Statement Analysis
PART 2 INTEREST RATES AND VALUING CASH FLOWS
Chapter 3 Time Value of Money: An Introduction
Chapter 4 Time Value of Money: Valuing Cash Flow Streams
Chapter 5 Interest Rates
Chapter 6 Bonds
Chapter 7 Stock Valuation
PART 3 VALUATION AND THE FIRM
Chapter 8 Investment Decision Rules
Chapter 9 Fundamentals of Capital Budgeting
Chapter 10 Stock Valuation: A Second Look
PART 4 RISK AND RETURN
Chapter 11 Risk and Return in Capital Markets
Chapter 12 Systematic Risk and the Equity Risk Premium
Chapter 13 The Cost of Capital
PART 5 LONG-TERM FINANCING
Chapter 14 Raising Equity Capital
Chapter 15 Debt Financing
PART 6 CAPITAL STRUCTURE AND PAYOUT POLICY
Chapter 16 Capital Structure
Chapter 17 Payout Policy
PART 7 FINANCIAL PLANNING AND FORECASTING
Chapter 18 Financial Modeling and Pro Forma Analysis
Chapter 19 Working Capital Management
Chapter 20 Short-Term Financial Planning
PART 8 Special Topics
Chapter 21 Option Applications and Corporate Finance
Chapter 22 Mergers and Acquisitions
Chapter 23 International Corporate Finance  

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FINANCIAL MANAGEMENT AND CORPORATE FINANCE - COLLECTION 2017 (FREE DOWNLOAD)

Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University
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Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business
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International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick
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Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
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Free download - PPT 2 - Link
Free download - PPT 3 - Link

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Excel Modeling in Corporate Finance, 5th Edition, 2015, Craig W. Holden, Indiana University
Fundamentals of Corporate Finance, 3rd Edition, 2015, Jonathan Berk, Stanford University, Peter DeMarzo, 
Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown

 

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017
Free download - PPT  - Link


Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016
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Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University
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Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown, 
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Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin
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Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter
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DOWNLOAD ALL TEST BANKs & CASE STUDY GUIDES - 2017

Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University - Test bank

Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business - Test bank

Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University - Test bank

International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick - Test bank

Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown - Test bank

Corporate Finance: The Core, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo - Test bank

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017 - Test bank

Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016 - Test bank

Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University - Test bank

Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown - Test bank

Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin - Test bank

Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter - Test bank

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For Test Bankz, Quiz Answers and Case study Guides, email to: This email address is being protected from spambots. You need JavaScript enabled to view it.

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