Question 1: The before-tax cost of debt for a firm which has a 40 percent marginal tax rate is 12 percent. The after-tax cost of debt is:
a. 4.8 percent
b. 6.0 percent
c. 7.2 percent
d. 12 percent
Question 2: The cost of capital reflects the cost of funds:
a. over a short-run time period
b. at a given point in time
c. over a long-run time period
d. at current book values
Question 3: Financial leverage measures the effect of fixed operating cost on the relationship between:
a. Sales and EBIT
b. Sales and EPS
c. EBIT and EPS
d. None of the above
Question 4: Total leverage measures the effect of fixed costs on the relationship between:
e. Sales and EBIT
f. Sales and EPS
g. EBIT and EPS
h. None of the above
Question 5: A decrease in fixed operating cost will result in ___________in the degree of financial leverage:
a. a decrease
b. an increase
c. no change
d. an undetermined change
Question 6: ____________is the potential use of fixed financial charges to magnify the effects of changes in earnings before interest and taxes on the firm’s earnings per share.
a. Financial leverage
b. Operating leverage
c. Total leverage
d. Debt service
Question 7: In general, with regard to dividend payments, the contractual constraints imposed by loan agreements can include all of the following EXCEPT
a. prohibit the payment of cash dividends until a certain level of earnings has been achieved.
b. limit the percentage of earnings that can be paid out in dividends
c. limit the actual dollar amount of dividends that can be paid out
d. require the payment of a common stock dividend
Question 8: ____________leverage is concerned with the relationship between sales revenues and earnings before interest and taxes.
a. Financial
b. Operating
c. Variable
d. Total
Question 9: At a base sales level or $400,000, a firm has a degree of operating leverage of 2 and a degree of financial leverage of 1.5. The firm’s degree of total leverage is:
a. 3.5
b. 3.0
c. .05
d. 1.3
Question 10: A dividend reinvestment plan _____________on the security.
a. decreases the return
b. has no effect on the return
c. increases the return
d. has an undetermined effect
Question 11: A corporation has $5,000,000 of 8 percent preferred stock outstanding and a 40 percent tax rate. The after-tax cost of the preferred stock is:
a. $400,000
b. $240,000
c. $666,667
d. $160,000
Question 12: The_____________ is the firm’s desired optimal mix of debt and equity financing.
a. book value
b. market value
c. cost of capital
d. target capital structure