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Exam 14: Capital Structure and Leverage

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Question 81

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A small computer manufacturer wants to price its product to earn a return of 60% on equity before interest and taxes. The computer has technological advantages that make management certain they can sell the firm's maximum production of 60,000 units per year at any reasonable price. The variable cost to build and sell a computer is $800, fixed costs are $5,500,000 per year and the firm has $9,000,000 in its equity account.

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If P is the selling price, co...

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Question 82

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The ROCE measures the profitability of operations before financing charges but after taxes on a basis comparable to ROE.

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B) False

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Question 83

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EBIT-EPS analysis tells management exactly how much leverage to use.

Assume the following facts about a single product firm: What is the firm's annual breakeven volume in sales revenues?

If a company has fixed costs of $40,000, a unit selling price of $12, and variable costs of $4 per unit, how many units will it have to sell to make a profit of $20,000?

The degree of financial leverage is measured by relating the percentage change in earnings per share to the percentage change in:

When the return on equity is equal to the return on capital employed:

Yang Centers has a book value of $8.75, a 10% cost of debt, operating income of $500,000, and a 30% tax rate. If Yang Centers finances 75% of its $4 million of total capital needs with debt, what is its earnings per share?

A firm with a capital structure with a large proportion of fixed costs will have a higher degree of operating leverage , while a company with a large amount of variable costs will have a lower degree of operating leverage.

A firm's degree of financial leverage is 2 and the degree of operating leverage is 2.5. What is their degree of total leverage?

Operating leverage increases as the proportion of __________________ increases. ​

A firm's degree of financial leverage is 1.5 and the degree of operating leverage is 2.0. What is their degree of total leverage?

Which of the following is true of the degree of total leverage?

Financial risk is not directly associated with ____.

If a company sells 20,000 units at $20 each, has fixed costs of $50,000 and a variable cost of $10 per unit, what is their degree of operating leverage (DOL) ?

When a firm's cost structure consists principally of fixed costs,:

Business risk is associated with ____.

Hamming & Heim Corp's capital of $3,000,000 is currently 100% equity. For the coming year, they are forecasting that earnings before interest and tax (EBIT)will be $1,240,000. The firm's stock is selling at its book value of $12 per share. Hamming & Heim is considering restructuring capital by buying back its own stock with cash raised by issuing debt until it reaches a capital structure that's 40% debt. The firm will pay 10% interest on any debt issued for this purpose. Assume there is no change in EBIT as a result of the capital structure change and that the tax rate is 40%. a. How many shares of stock does Hamming & Heim need to repurchase in order to achieve the target capital structure of 40% debt and 60% equity? b. What is Hamming & Heim's Degree of Financial Leverage (DFL)after implementing the refinancing plan? (round to the nearest two decimal places) c. What was Hamming & Heim's Return on Capital Employed (ROCE)before implementing the refinancing plan? d. Will the restructuring improve the firm's ROE and EPS performance?

Hatfield, Inc. sells its product for $14.00. Variable costs are $9.00 per unit, and Hatfield has $800,000 in fixed costs. Assume that Hatfield has $1.0 million in total debt and equity and a 40% tax rate. What is Hatfield's ROCE when sales are at 10% above breakeven?

Describe generally how leverage affects stock prices. What forces are at work, driven by what effects?