Finance Flashcards

Chapt 13 Finance

. _______________________costs are those costs that do not vary with the company’s level of production. Fixed
Costs that change as the company’s production levels change are called __________________ costs. Variable
A sales _____________________ chart shows graphically how fixed costs, variable costs, and sales revenue interact. Sales breakeven
A measure of the magnitude of the effect of fixed costs on operating income is ___________________. Degree of operating leverage
Whenever fixed costs are greater than __________, the degree of operating leverage is greater than 1. Zero
Firms that have low fixed costs and high variable costs are generally ____________risk than firms that have high fixed costs and low variable costs, but they will also have ________________ profit potential. Higher; higher
_____________________________ is the additional volatility of net income caused by the presence of fixed costs associated with having debt in the capital structure. Financial leverage
Firms that have higher proportions of debt in their capital structure will have ____________________ financial leverage. Greater
The total effect of operating and financial leverage is called ___________________ leverage. Combined
A _____________________________ is when one firm buys out another using a large amount of borrowed money. Leveraged buyout
Higher leverage is helpful when sales _____________________ . . Increase
. ________________________________ is the mixture of sources of funds that a firm uses (debt, preferred, and common). Capital structure
One of the primary advantages of using debt financing is ____________________ ___________________. The tax deductibility of interest
The weighted average cost of capital generally ___________________ as more capital is added. Rises
Modigliani and Miller suggested that if debt costs did not increase with additional borrowing, the tax deductibility benefit would imply that firms should finance with __________ percent debt. 100
Financial managers use capital structure theory to help determine the mix of debt and equity that ____________________________ the weighted average cost of capital. Minimizes
Bonds pay a lower rate of return to investors because investors have lower __________________________. Risk
What are the risks and benefits of having fixed costs in your operations? Fixed costs in your operations will cause EBIT to rise by a larger percentage than sales when unit sales are increasing. However, if unit sales decline, the firm’s EBIT will decrease by a greater percentage than does sales
Under what circumstances will high combined leverage be most beneficial to a company? High combined leverage will be most beneficial when a firm is experiencing increasing sales and has a low cost of debt.
As a firm moves to a capital structure with higher debt: financial risk of the firm increases
Firms with relatively low fixed operating costs and high variable operating costs can best be described as: having a low degree of operating leverage
Given fixed costs of $100,000, variable costs of $7.00 per unit, and a sales price per unit of $10.00, calculate the break-even point in units. 33,333
Operating leverage has the effect of triggering: a larger percentage change in EBIT when a given percentage change in sales occurs
All else equal, new equity financing will: decrease financial risk
Fixed operating costs affect: operating leverage
Whenever fixed costs are greater than zero, DOL is: greater than 1
Factors affecting capital structure include: the cost of debt, preferred stock, and common equity, market conditions ,investor perceptions
Which of the following statements is true? The interest payment tax shield lowers the cost of debt.
If Firm X has a greater variability in operating earnings than Firm Y, which firm has the lower business risk? it would depend on the volatility of sales for the two firms

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