Ch13problems - AGEC 424 Homework for Chapter 13(some of the later problems may have been done in lab and/or lecture 2 The use of fixed-cost

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Homework for Chapter 13 (some of the later problems may have been done in lab and/or lecture) 2. The use of fixed-cost financing is referred to as: a. operating leverage. b. a leveraged buyout. c. financial leverage. d. combined leverage. 4. The degree of financial leverage is measured by relating the percentage change in earnings per share to the percentage change in: a. sales. b. EBIT. c. debt ratio. d. share price. 10. Financial leverage has the following effect on financial performance. a. During periods of reasonably good performance, leverage enhances results in terms of ROE and EPS. b. Leverage adds variability to financial performance making the firm’s stock a riskier investment. c. Leverage always makes performance better and thereby increases stock price. d. Both a and b 11. A DFL (degree of financial leverage) of 3.0 indicates that a 27% increase in EPS is the result of a _____ increase in EBIT. a. 81% b. 3% c. 9% d. 6% 12. Consider the following leverage scenarios: Leverage Scenarios (000s) #1 #2 #3 0% Debt 50% Debt 80% Debt Capital Debt $1,000 $1,600 Equity $2,000 1,000 400 Total capital 2,000 $2,000 $2,000 Shares @ $10 200,000 100,000 40,000 Revenue $2,000 $2,000 $2,000 Less costs/expenses 1,800 1,800 1,800 EBIT 200 200 200 Interest expense (10%) 100 160 EBT 200 100 40 Taxes @ 40% 80 40 16 Earnings after tax $ 120 $ 60 $ 24 ROE 6% 6% 6% EPS $.60 $ .60 $ .60 If under certain circumstances, financial leverage enhances performance measured by ROE and EPS, why does shifting from equity into debt have no effect in this case? a.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/08/2010 for the course AGEC 424 taught by Professor Staff during the Spring '08 term at Purdue University-West Lafayette.

Page1 / 4

Ch13problems - AGEC 424 Homework for Chapter 13(some of the later problems may have been done in lab and/or lecture 2 The use of fixed-cost

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online