Chapter 4: Financing Decisions - Leverage and Capital Structure

Question 1

One of the most important firm decisions is how much __________ a firm should employ

Answer 1

Leverage

Question 2

Costs that does not change

Answer 2

Fixed Costs

Question 3

Costs that does change with the level of operation/volume of production.

Answer 3

Variable Costs

Question 4

Leverage is the degree or level in which a company must incur __________

Answer 4

Fixed Costs

Question 5

The extent to which the firm gets cash resources from borrowing as opposed to additional shares of equity.

Answer 5

Financial Leverage

Question 6

T/F

The greater the debt equity, the more lesser leveraged the firm is because debt legally obligates the firm to pay interest.

Answer 6

False

The greater the debt equity, the more “higher” leveraged the firm is because debt legally obligates the firm to pay interest.

Question 7

Option A: Older Machine

• Rental: 10,000 / year
• Variable Cost: 30 per unit
• Selling Price: 50 per unit
• can produce 6,000 units

Option B: New machines

• Rental: 15,000
• Variable Cost: 25 per unit
• Selling Price: 50 per unit
• can produce 10,000 units

Compute:
Gross profit/margin

Answer 7

Found in printed paper

Question 7

The extent to which a firm commits itself to high levels of fixed cost other than the interest rate.

Answer 7

Operating Leverage

Question 7

Option A: Older Machine

• Rental: 10,000 / year
• Variable Cost: 30 per unit
• Selling Price: 50 per unit
• can produce 6,000 units

Option B: New machines

• Rental: 15,000
• Variable Cost: 25 per unit
• Selling Price: 50 per unit
• can produce 10,000 units

Compute:
Break Even-point

Answer 7

Found in Printed Paper

Question 8

Acts as a lever to magnify the influence of fluctuations.

Answer 8

Financial Leverage

Question 9

is magnified on the earnings per share by operation of leverage.

Answer 9

Earnings before interest and Taxes (EBIT)

Question 9

The greater the degree of leverage, the wider the variation in EPS given any change in EBIT.

Answer 9

Financial Leverage

Question 10

ABC Company is capitalized with P1M divided in 1,000 common shares of P1,000 each. The management wishes to raise another P1M to finance a major program of expansion through one of our possible financing plans. The Management may finance the company with:

a.) All Common Stock

b.) P500K in common stock and P500K in debt at 10% interest, or

c.) all debt at 6% interest

d.) P500K in common stock and P500K in preferred stock with 10% per dividend.

The company’s existing earnings before interest and taxes (EBIT) amounted to P120,000. Corporation tax is assumed to be 32 percent.

Compute:
Option A & B

Answer 10

Found in printed paper

Question 11

ABC Company is capitalized with P1M divided in 1,000 common shares of P1,000 each. The management wishes to raise another P1M to finance a major program of expansion through one of our possible financing plans. The Management may finance the company with:

a.) All Common Stock

b.) P500K in common stock and P500K in debt at 10% interest, or

c.) all debt at 6% interest

d.) P500K in common stock and P500K in preferred stock with 10% per dividend.

The company’s existing earnings before interest and taxes (EBIT) amounted to P120,000. Corporation tax is assumed to be 32 percent.

Compute:
Option C

Answer 11

Found in printed paper

Question 12

ABC Company is capitalized with P1M divided in 1,000 common shares of P1,000 each. The management wishes to raise another P1M to finance a major program of expansion through one of our possible financing plans. The Management may finance the company with:

a.) All Common Stock

b.) P500K in common stock and P500K in debt at 10% interest, or

c.) all debt at 6% interest

d.) P500K in common stock and P500K in preferred stock with 10% per dividend.

The company’s existing earnings before interest and taxes (EBIT) amounted to P120,000. Corporation tax is assumed to be 32 percent.

Compute:
Option D

Answer 12

Found in printed paper

Question 13

ABC Company is capitalized with P1M divided in 1,000 common shares of P1,000 each. The management wishes to raise another P1M to finance a major program of expansion through one of our possible financing plans. The Management may finance the company with:

a.) All Common Stock

b.) P500K in common stock and P500K in debt at 10% interest, or

c.) all debt at 6% interest

d.) P500K in common stock and P500K in preferred stock with 10% per dividend.

The company’s existing earnings before interest and taxes (EBIT) amounted to P120,000. Corporation tax is assumed to be 32 percent.

Compute:
Reccomendation

Answer 13

Found in the Printed Paper

Question 14

Sunlight Corporation is capitalized with P100M worth of common stocks at P1,000 per share. It needs to raise additional P50M for its branch expansion in Mindanao with common shares at P1,000 per share. EBIT is at P15M and tax rate is 30%. It considers 4 options:

Option A: All debt at 8%

Option B: All common stock

Option C: 50% debt at 8% interest rate and 50% common

Option D: 50% common and the remaining half is 15% prefeered Stock

Compute
EPS in Option A

Answer 14

Found in Printed Paper

Question 15

Sunlight Corporation is capitalized with P100M worth of common stocks at P1,000 per share. It needs to raise additional P50M for its branch expansion in Mindanao with common shares at P1,000 per share. EBIT is at P15M and tax rate is 30%. It considers 4 options:

Option A: All debt at 8%

Option B: All common stock

Option C: 50% debt at 8% interest rate and 50% common

Option D: 50% common and the remaining half is 15% prefeered Stock

Compute
EPS in Option B

Answer 15

Found in Printed Paper

Question 16

Sunlight Corporation is capitalized with P100M worth of common stocks at P1,000 per share. It needs to raise additional P50M for its branch expansion in Mindanao with common shares at P1,000 per share. EBIT is at P15M and tax rate is 30%. It considers 4 options:

Option A: All debt at 8%

Option B: All common stock

Option C: 50% debt at 8% interest rate and 50% common

Option D: 50% common and the remaining half is 15% prefeered Stock

Compute
EPS in Option C

Answer 16

Found in Printed Paper

Question 17

Sunlight Corporation is capitalized with P100M worth of common stocks at P1,000 per share. It needs to raise additional P50M for its branch expansion in Mindanao with common shares at P1,000 per share. EBIT is at P15M and tax rate is 30%. It considers 4 options:

Option A: All debt at 8%

Option B: All common stock

Option C: 50% debt at 8% interest rate and 50% common

Option D: 50% common and the remaining half is 15% prefeered Stock

Compute
EPS in Option D

Answer 17

Found in Printed Paper

Question 18

Sunlight Corporation is capitalized with P100M worth of common stocks at P1,000 per share. It needs to raise additional P50M for its branch expansion in Mindanao with common shares at P1,000 per share. EBIT is at P15M and tax rate is 30%. It considers 4 options:

Option A: All debt at 8%

Option B: All common stock

Option C: 50% debt at 8% interest rate and 50% common

Option D: 50% common and the remaining half is 15% prefeered Stock

Compute
Give your recommendation

Answer 18

Found in Printed Paper

Question 19

Formula of Break Even Point

Answer 19

BEP = FC / CM (SP - VC)

Question 20

The format of Financial Leverage

Answer 20

Gross Sales
Less: CGS
Gross Profit
Less: Operating Expense
Earning before interest and taxes (EBIT)
Less: Interest Expense
Earning before tax
Less: Tax
Net Income

Question 21

Format of Getting EPS

Answer 21

EBIT
Less: Interest Expense
Earnings before Tax
Less: Tax Expense
Earnings after tax
Less: Dividend payment to P/S
Earnings avail to C/Stockholders
No. of shares outstanding
Add: C/ shares
EPS

Question 22

Who are you?

Answer 22

A CPA, MBA, Lawyer, Doctor and has 3 certifications in my belt.