1. Financial leverage impacts the performance of a firm by:
A. increasing the volatility of the firm's EBIT.
B. decreasing the volatility of the firm's EBIT.
C. decreasing the volatility of the earnings to firm's shareholders.
D. increasing the volatility of the earnings to firm's shareholders
E. lowering the firm's level of risk.
2. Holly's is currently an all equity firm that has 10,000 shares of stock outstanding at a market price of $60 a share. The firm has decided to leverage its operations by reduce outstanding stocks and issuing $120,000 of debt at an interest rate of 9.5 percent. The firm’s operating income are project as the follows: Normal economic condition (50% probability): $500,000 Economic expansion (30% probability): $650,000 Economic downturn (20% probability): $300,000. What is the expected value of earnings available to shareholder after the change in capital structure. Ignore taxes.
3. In general, the capital structures used by U.S. firms:
A. tend to overweigh debt in relation to equity.
B. generally result in debt-equity ratios between 0.45 and 0.60.
C. are fairly standard for all SIC codes.
D. tend to be those which maximize the use of the firm's available tax shelters.. vary significantly across industries.