Capital Structure 2

Question 1

degree of financial leverage

Answer 1

reflects how well a company uses borrowed money to increase the income applicable to the owners of common stock

Question 2

Degree of Financial Leverage formula

Answer 2

% increase in EPS / % increase in EBIT

Question 3

leveraged buyout

Answer 3

a transaction that is mostly financed by taking on debt with little money being contributed by the owners

Question 4

congeneric merger

Answer 4

merger of two companies that operate in related industries but do not offer the same products

Question 5

reverse acquisition

Answer 5

when a private company acquires a public firm to bypass the complex and costly process of going public

Question 6

reverse acquisitions have become more common in recent years

Answer 6

due to foreign firms wanting to enter the U.S. capital markets

Question 7

Preferred stock

Answer 7

has features of bonds (a fixed dividend) and equity (no maturity)

Question 8

Subordinated Bond

Answer 8

means junior in standing

Question 9

Senior Bond means the

Answer 9

bondholders are in the front of the line in terms of repayment

Question 10

Long term debt is generally cheapest for two reasons

Answer 10

1) the interest rate on the debt is tax deductible

2) debt is repaid first so it has less risk.