Final Exam

Question 1

Variability of the firms expected earnings before interest and taxes

Answer 1

business risk

Question 2

Additional variability in earnings available to the firms common stockholders. This is a direct result of the firms financing decisions.

Answer 2

financial risk

Question 3

The breakeven quantity of output results in an EBIT level equal to

Answer 3

zero

Question 4

In a breakeven model, production costs are divided into what two categories?

Answer 4

fixed and variable costs

Question 5

Administrative salaries, depretiation, property taxes, insurance premiums are all examples of?

Answer 5

fixed costs

Question 6

DM, DL, packaging, sales comission are all examples of what

Answer 6

variable costs

Question 7

At breakeven, how much is your profit?

Answer 7

zero

Question 8

What is the responsiveness of a firms EBIT to fluctuations in sales

Answer 8

operating leverage

Question 9

What is the responsiveness of the companys earnings per share (EPS) to changes in EBIT

Answer 9

financial leverage

Question 10

The greater the degree of fin leverage, the greater the fluctuations in ___

Answer 10

EPS

Question 11

If the DCL is equal to 5 times…

Answer 11

Then a 1% change in sales will result in a 5% change in EPS

Question 12

The average rate paid for the use of the firms capital funds

Answer 12

cost of capital

how much a company pays to get capital from others

Question 13

What are the two sources of capital?

Answer 13

debt and equity (CS and pref stock)

Question 14

What provides a benchmark against which to evaluate investment returns

Answer 14

cost of capital

IRR>cost of capital- in order to invest

Question 15

What is the capital structure?

Answer 15

debt
pref stock
commons stock

Question 16

What are the diff risk levels of the cap structure?

Answer 16

debt is cheapest because theres a guarentee you will get $; low return and low risk
Pref stock is in bw both
CS is most expenseive bc theres high risk and high return

Question 17

What is the weighted average cost of capital of the costs of the 3 components

Answer 17

WACC

Question 18

WACC can be calculated based on what two things?

Answer 18

market value and book value

Question 19

What is the account value; is found on the balance sheet; looks at total debt in proportion to assets; Is very easy to use; uses par value

Answer 19

Book value

Question 20

What is calculated using present value; difficult to calculate but most appropriate

Answer 20

market value

** uses market value of share

Question 21

You must adjust what to reflect flotation costs

Answer 21

cost of pref stock
cost of new equity stock
COST OF RETAINED EARNINGS DOES NOT ADJUST TO FLOTATION COSTS

Question 22

When evaluating S-VC=GP equation, if there are no fixed costs any change in sales will be followed by

Answer 22

the same % change in EBIT

Question 23

When evaluating S-VC=GP equation, if there are fixed costs any change in sales will be followed by

Answer 23

a greater % change in profit

Question 24

If a company doesn’t have any debt, it will not have interest, so any increase in EBIT will be followed by

Answer 24

the same % in EPS

Question 25

If a company has debt (interest), any increase in EBIT will be followed by

Answer 25

greater % increase in EPS

Question 26

The following info is available for Haverty com: Current per share market price $48 Most recent per share div $3.50 Expected long-term growth rate 5% Havery can issue new common stock to net the comp $44 per share Determine the cost of equity raised through selling new stock using the div model approach

Answer 26

13.3%

Question 27

The following info is available for Haverty com: Current per share market price $48 Most recent per share div $3.50 Expected long-term growth rate 5% Havery can issue new common stock to net the comp $44 per share Determine the cost of retained earnings raised through selling new stock using the div model approach

Answer 27

12.7%

Question 28

The following info is available concerning a firm's capital: Debt: bonds w a fv of $1000 and an initial 20 year term were issued 5 years ago w a coupon rate of 8%. Today these bonds are selling for $846.30 Pref stock: pref stock that pays an annual div of $9.50 is trading at $79.16 Common Equity: The stock is selling at $22.50 per share. An annual div of $1.70 was just paid and expected to grow indefinetly at 6%. Target cap structure: Firms target cap structure is 30% debt, 20% pref stock, and 50% equity Firm can ssue any type of security without paying flotation costs. The combined federal and state tax rate is 40%

Answer 28

debt: .06 Ps: .12 cs: .14 .06(30+.12(20)+.14(50)= 11.2%