ch15 - Chapter 15 Capital Structure and the Cost of Capital...

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Chapter 15 Capital Structure and the Cost of Capital TRUE-FALSE QUESTIONS T 1. The firm’s capital structure is the mix of debt and equity used to finance its assets. F 2. The firm’s optimum debt/equity mix maximizes the firm’s cost of capital, which in turn will help the firm to maximize shareholder wealth. F 3. Firm value is calculated by adding expected cash flow to the firm’s cost of capital under each capital structure. F 4. Similar to the net present value method, there is a formula to determine the proportions of debt and equity a firm should use to finance its assets. T 5. EBIT/EPS analysis allows managers to see how different capital structures affect the earnings levels of their firms. T 6. EBIT/EPS analysis shows the ranges of EBIT where a firm may prefer one capital structure over another. F 7. A firm’s financial risk is measured by its variability in EBIT over time. T 8. Operating leverage affects the top portion of a firm’s income statement whereas financial leverage affects the bottom half of the income statement. T 9. The degree of financial leverage measures the sensitivity of earnings per share to changes in EBIT. T 10. The degree of financial leverage may be measured by taking the firm’s earnings before interest and taxes and dividing by earnings before taxes. F 11. The degree of combined leverage is the percentage change in earnings per share that results from a one percent change in EBIT. T 12. A firm’s degree of combined leverage is the product of its degree of operating leverage and its degree of financial leverage
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T 13. When the interest expense is zero, the percentage change in earnings per share will be the same as the percentage change in EBIT. F 14. Corporate investors can exempt all preferred dividend income from income taxes. T 15. Some classes of common equity may have superior voting rights. T 16. One advantage of preferred is that it increases a firm’s equity without diluting the ownership and control of the common shareholders. F 17. The cost of debt represents the minimum acceptable rate of return to a firm on a project of average risk. F 18. Relevant cash flows are incremental before-tax cash flows. T 19. The minimum required rate of return is a weighted average of the firm’s cost of various sources of capital. T 20. A non-optimal capital structure may lead to higher financing costs. F 21. Leverage does not affect EPS for most firms. F 22. A greater percentage of European multinational firms use weighted average costs of capital as their project discount rates than U.S. firms. T 23. Financial theory favors the method using the market values of the firm’s debt and equity to compare target and actual weights. T
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This note was uploaded on 11/01/2011 for the course ACC 200 taught by Professor Minliu during the Spring '11 term at Universidad Europea de Madrid.

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ch15 - Chapter 15 Capital Structure and the Cost of Capital...

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