Midterm Prep

Question 1

Alpha Industries stock sold for $39 a share at the beginning of the year. During the year, the company paid a dividend of $3 a share and then ended the year with a stock price of $37. The change in the stock price is best described as a:

Answer 1

capital loss.

Question 2

The excess return is computed by ________ the average return for the investment.

Answer 2

subtracting the average return on the U.S. Treasury bill from

Question 3

One year ago, you purchased a stock at a price of $32.50. The stock pays quarterly dividends of $.40 per share. Today, the stock is worth $34.60 per share. What is the total dollar return per share to date from this investment?

Answer 3

$3.70

You would have received 4 quarterly dividends since you bought the stock 1 year ago, so $0.40 x 4 = $1.60 per share. Plus the stock has appreciated from $32.50 to $34.60, or $2.10 per share. This is the capital gain. The total return is $1.60 + $2.10 = $3.70.

Question 4

You bought 360 shares of stock at a total cost of $7,754.40. You received a total of $403.20 in dividends and sold your shares for $19.98 a share. What was your total rate of return?

Answer 4

-2.04 percent

You can calculate the percentage rate of return on a per share basis or in total. Either would give you the same result. In this case, we are given the total amounts for the purchase and the dividends, so it may be easier to calculate the total amount for the sale price (360 shares x $19.98 = $7,192.80). So the total return is the dividends ($403.20) plus the capital gain or loss ($7,192.80 - $7,754.40 = -$561.60). So total return is $403.20 - $561.60 = -$158.40. To get the rate of return we divide this by the initial investment of $7,754.40 = -0.02042711 or -2.04%.

Question 5

Assume that over the last several decades, the total annual returns on large-company common stocks averaged 12.1 percent, small-company stocks averaged 16.5 percent, long-term government bonds averaged 6 percent, and U.S. T-bills averaged 3.4 percent. What was the average excess return earned by long-term government bonds, and small-company stocks respectively?

Answer 5

2.6 percent; 13.1 percent

GLTB - Tbill
Sc - Tbill

Question 6

Which one of the following statements is correct concerning the standard deviation of a portfolio?

A) The greater the diversification of a portfolio, the greater the standard deviation of that portfolio.
B) The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio.
C. Standard deviation is used to determine the amount of risk premium that should apply to a portfolio.
D) The standard deviation of a portfolio is equal to the geometric average standard deviation of the individual securities held within that portfolio.
E) The standard deviation of a portfolio is equal to a weighted average of the standard deviations of the individual securities held within the portfolio.

Answer 6

B) The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio.

Question 7

As we add more diverse securities to a portfolio, the ________ risks of the portfolio will decrease.

Answer 7

total and unsystematic

Question 8

According to the CAPM, the expected return on a security is:
A) negatively and non-linearly related to the security’s beta.
B) negatively and linearly related to the security’s beta.
C) positively and linearly related to the security’s variance.
D) positively and non-linearly related to the security’s beta.
E) positively and linearly related to the security’s beta.

Answer 8

E) positively and linearly related to the security’s beta.

Question 9

You recently purchased a stock that is expected to earn 11.3 percent in a booming economy, 8.8 percent in a normal economy, and lose 3.1 percent in a recessionary economy. Each economic state is equally likely to occur. What is your expected rate of return on this stock?

Answer 9

5.67

To calculate the expected return we simply weight the possible outcomes by their probability. In this case, each outcome is equally likely, so we can calculate a simple average of 11.3, 8.8 and -3.1. We sum them and divide by the number of terms (3) to calculate the average. (11.3+8.8-3.1)/(3) = 5.666667 or 5.67%. You could also do a weighted average weighting each outcome by 1/3 (each has a 1 in 3 chance of occurring) and you would get exactly the same result.

Question 10

The risk-free rate of return is 3.68 percent and the market risk premium is 7.84 percent. What is the expected rate of return on a stock with a beta of 1.32?

Answer 10

14.03 percent

This question is an application of the CAPM (Capital Asset Pricing Model). That is the model to use to find the expected rate of return (or cost of equity) on a stock. CAPM = Rf + b(Rm-Rf) where (Rm-Rf) is the market risk premium. In this case, the cost of equity = 3.68 + 1.32(7.84) = 14.0288 or 14.03%.

Question 11

The stock of Martin Industries has a beta of 1.43. The risk-free rate of return is 3.6 percent and the market risk premium is 9 percent. What is the expected rate of return?

Answer 11

16.47 percent

The expected rate of return can be calculated using the CAPM (Capital Asset Pricing Model). CAPM = Rf + b(Rm-Rf) where (Rm-Rf) is the market risk premium. In this case, CAPM = 3.6 + 1.43 (9) = 16.47 percent.

Question 12

Which one of these statements is correct concerning the CAPM?

A) The CAPM is the only available method for determining an appropriate discount rate for a proposed project.
B) The market rate of return is most commonly based on the forecasted return on the market for the next 5-year period.
C) CAPM is used quite frequently by firms in their capital budgeting process.
D) The expected return on the 30-year U.S. Treasury bond is the most commonly used as the risk-free rate of return.
E) An increase in the risk-free rate combined with a beta greater than 1.0 increases the discount rate computed using the CAPM.

Answer 12

C) CAPM is used quite frequently by firms in their capital budgeting process.

Question 13

Lewis Bros. currently has outstanding debt but has decided to issue additional debt for expansion purposes. The pretax cost of the new debt is best estimated at the ________ of the currently outstanding debt.

Answer 13

current yield to maturity

Question 14

Southern Imports is an all-equity firm with a beta of 1.32. The firm is considering a new project that entails less risk than its current operations and thus management feels that the firm’s beta should be lowered by .18 when assigning a discount rate to this project. The market rate of return is 9.4 percent and the risk-free rate is 2.8 percent. What discount rate should be assigned to this project?

Answer 14

10.32 percent

If management has an estimate of the correct beta aligned with the risk of new, less risky project, it should be used in CAPM to estimate the appropriate cost of equity. Since the firm is all equity financed, that would also be the correct discount rate or WACC to evaluate the project. In this case, CAPM = 2.8 + (1.32-0.18)(9.4-2.8) = 10.324 or 10.32%.

Question 15

Acme Inc has debt outstanding with a coupon rate of 2 percent and a yield to maturity of 4.2 percent. What is the after-tax cost of debt if the tax rate is 21 percent? Assume all interest is tax deductible.

Answer 15

3.32

Remember that the coupon rate is only used to determine the coupon or interest payments on the debt. It is not the firm’s cost of debt nor is it the effective return holders of the bond will receive. Those are both the yield-to-maturity on the bond. In this case, the YTM is 4.2%. This is the pre-tax cost of debt. To find the after-tax cost (which means to include the benefit of the tax-deductibility of the interest payments) we must multiply the 4.2% by (1-Tax rate). In this case, 4.2 x (1-0.21) = 3.318 or rounded it is 3.32%. This answer makes sense as we would expect the answer to be something slightly less than the pre-tax cost of debt.

Question 16

Consolidated Construction has a beta of 1.3. The risk-free rate of return is 3.2 percent and the expected market return is 12.4 percent. What is Consolidated’s cost of equity?

Answer 16

15.16

Question 17

Peter’s Audio has a yield to maturity on its debt of 6.4 percent, a cost of equity of 11.4 percent, and a cost of preferred stock of 9 percent. The firm has 115 shares of common stock outstanding at a market price of $24 a share. There are 15 shares of preferred stock outstanding at a market price of $40 a share. The bond issue has a total face value of $1,500 and sells at 97 percent of face value. If the tax rate is 25 percent and assuming all interest is tax deductible.

What is the pre-tax cost of debt?

Answer 17

6.4

The YTM on the debt is same thing as the pre-tax cost of debt. It is given in the problem statement as 6.4%. That is the answer.

Question 18

Peter’s Audio has a yield to maturity on its debt of 6.4 percent, a cost of equity of 11.4 percent, and a cost of preferred stock of 9 percent. The firm has 115 shares of common stock outstanding at a market price of $24 a share. There are 15 shares of preferred stock outstanding at a market price of $40 a share. The bond issue has a total face value of $1,500 and sells at 97 percent of face value. If the tax rate is 25 percent and assuming all interest is tax deductible.

What is the weighting for debt?

Answer 18

30.22

To find the weighting for the debt, we need to know the MARKET value of the debt divided by the total capital (debt + preferred stock + common stock). In this case, the debt has a face value of $1,500, but is selling for 97% of its face value, so the market value is 0.97 X $1,500 = $1,455. This is the numerator. The denominator is the value of all three combined. So bond value is $1,455. Preferred stock value is $15 x 40 = $600. The value of the common stock is $115 x 24 = $2,760. So the calculation is $1,455 / ($1,455+$600+$2,760) = 0.302180609 or 30.2180609%. Rounded to two decimals, the answer is 30.22%.

Question 19

Peter’s Audio has a yield to maturity on its debt of 6.4 percent, a cost of equity of 11.4 percent, and a cost of preferred stock of 9 percent. The firm has 115 shares of common stock outstanding at a market price of $24 a share. There are 15 shares of preferred stock outstanding at a market price of $40 a share. The bond issue has a total face value of $1,500 and sells at 97 percent of face value. If the tax rate is 25 percent and assuming all interest is tax deductible.

What is the after-tax cost of debt?

Answer 19

4.8

The after-tax cost of debt is the pre-tax cost of debt multiplied by 1-tax rate. The pre-tax cost of debt is the YTM on the outstanding debt and was given in the question as 6.4%. Since the tax rate is 25%, the after-tax cost of debt would be 6.4 x (1-0.25) = 4.80%.

Question 20

Peter’s Audio has a yield to maturity on its debt of 6.4 percent, a cost of equity of 11.4 percent, and a cost of preferred stock of 9 percent. The firm has 115 shares of common stock outstanding at a market price of $24 a share. There are 15 shares of preferred stock outstanding at a market price of $40 a share. The bond issue has a total face value of $1,500 and sells at 97 percent of face value. If the tax rate is 25 percent and assuming all interest is tax deductible.

What is the cost of the preferred stock?

Answer 20

9

The cost of the preferred stock is usually calculated based on the dividend the preferred stock generates. In this case it is given as 9%. That is the correct answer.

Question 21

Peter’s Audio has a yield to maturity on its debt of 6.4 percent, a cost of equity of 11.4 percent, and a cost of preferred stock of 9 percent. The firm has 115 shares of common stock outstanding at a market price of $24 a share. There are 15 shares of preferred stock outstanding at a market price of $40 a share. The bond issue has a total face value of $1,500 and sells at 97 percent of face value. If the tax rate is 25 percent and assuming all interest is tax deductible.

What is the weighting for the preferred stock?

Answer 21

12.46

To find the weighting for the preferred stock, we need to know the MARKET value of the preferred stock divided by the total capital (debt + preferred stock + common stock). In this case, the preferred stock has a market value of $15 per share and there are 40 shares outstanding. So 40 X $15 = $600. This is the numerator. The denominator is the value of all three combined. So the bond value is $1,455 (calculated previously as the market value = face value x 0.97). Preferred stock value is $15 x 40 = $600. The value of the common stock is $115 x 24 = $2,760. So the calculation is $600 / ($1,455+$600+$2,760) = 0.12461059 or 12.46% rounded.

Question 22

Peter’s Audio has a yield to maturity on its debt of 6.4 percent, a cost of equity of 11.4 percent, and a cost of preferred stock of 9 percent. The firm has 115 shares of common stock outstanding at a market price of $24 a share. There are 15 shares of preferred stock outstanding at a market price of $40 a share. The bond issue has a total face value of $1,500 and sells at 97 percent of face value. If the tax rate is 25 percent and assuming all interest is tax deductible.

What is the cost of the common stock?

Answer 22

11.4

The cost of the common stock is usually derived using the CAPM model. In this case it is given as 11.4%. That is the correct answer.

Question 23

Peter’s Audio has a yield to maturity on its debt of 6.4 percent, a cost of equity of 11.4 percent, and a cost of preferred stock of 9 percent. The firm has 115 shares of common stock outstanding at a market price of $24 a share. There are 15 shares of preferred stock outstanding at a market price of $40 a share. The bond issue has a total face value of $1,500 and sells at 97 percent of face value. If the tax rate is 25 percent and assuming all interest is tax deductible.

What is the weighting of the common stock?

Answer 23

57.32

To find the weighting for the common stock, we need to know the MARKET value of the common stock divided by the total capital (debt + preferred stock + common stock). In this case, common stock has a market value of $115 x 24 shares outstanding, or $2,760. This is the numerator. The denominator is the value of all three combined. So bond value is $1,455. Preferred stock value is $15 x 40 = $600. The value of the common stock is $115 x 24 = $2,760. So the calculation is $2,760 / ($1,455+$600+$2,760) = 0.57320872, which would round to 57.32%.

Question 24

Peter’s Audio has a yield to maturity on its debt of 6.4 percent, a cost of equity of 11.4 percent, and a cost of preferred stock of 9 percent. The firm has 115 shares of common stock outstanding at a market price of $24 a share. There are 15 shares of preferred stock outstanding at a market price of $40 a share. The bond issue has a total face value of $1,500 and sells at 97 percent of face value. If the tax rate is 25 percent and assuming all interest is tax deductible.

What is the WACC?

Answer 24

9.11

The formula for WACC is the weighted average of each element. So, in this case, (1) the cost of equity times the weighting for equity, plus (2) the cost of preferred stock times the weighting for the preferred stock, plus (3) the weighting for the debt times the AFTER-TAX cost of debt. Here are the numbers: ((0.5732)x(11.4))+((0.1246)x(9))+((0.3022)x(6.4)x(1-0.25)) = (6.53448)+(1.1214)+(1.45056)=9.10644, or rounded to two decimal places, 9.11%.

Question 25

A manager should attempt to maximize the value of the firm by changing the capital structure if and only if the value of the firm increases:

Answer 25

as a result of the change.

Question 26

The concept of homemade leverage is most associated with:

A)  MM Proposition I with no tax. 
B)  MM Proposition II with no tax. 
C)  MM Proposition I with tax. 
D)  MM Proposition II with tax. 
E)  no MM Proposition.

Answer 26

A) MM Proposition I with no tax.

Question 27

The proposition that the value of the firm is independent of its capital structure is called:

A)  the capital asset pricing model. 
B)  MM Proposition I (no taxes). 
C)  MM Proposition II (no taxes). 
D)  the law of one price. 
E)  the efficient markets hypothesis.

Answer 27

B) MM Proposition I (no taxes).

Question 28

MM Proposition I with taxes is based on the concept that the:

A) optimal capital structure is the one that is totally financed with equity.
B) capital structure of the firm does not matter because investors can use homemade leverage.
C) firm is better off with debt based on the weighted average cost of capital.
D) presence of taxes causes debt to be valuable to a firm.
E) cost of equity increases as the debt-equity ratio of a firm increases.

Answer 28

D) presence of taxes causes debt to be valuable to a firm.

Question 29

Uptown Interior Designs is an all-equity firm that has 40,000 shares of stock outstanding. The company has decided to borrow $74,000 to buy out the 2,100 shares of a deceased stockholder. What is the total value of this firm if you ignore taxes?

Answer 29

$1,409,524

The value of the firm is the value of the equity plus the value of the debt. Since there is no debt, the firm value is equal to the equity value. That number is calculated using the stock price per share times the number of shares (the market capitalization). The price per share is $74,000 / 2,100 shares since we know that is the current market price for the repurchase of the deceased shareholder’s shares. So the stock price is $35.2380952 per share. That number times the total outstanding shares (40,000) is the value and market cap of this firm, = $1,409,523.81. Rounded to the nearest whole dollar, the answer is $1,409,523.

Question 30

The Backwoods Lumber Co. has a debt-equity ratio of .68. The firm’s required return on assets is 11.7 percent and its levered cost of equity is 15.54 percent. What is the pretax cost of debt based on MM Proposition II with no taxes?

Answer 30

6.05 percent

MMII without taxes tells us the cost of levered equity given the unlevered cost and the cost of debt as well as the D/E ratio. In this case, 15.54 = 11.7 + 0.68 ( 11.7-Rb), solve for the cost of the debt. 15.54-11.7=7.956-0.68Rb ==> -4.116 = -0.68Rb ==> 6.0529, or rounded to 6.05%.

Question 31

Joe’s Leisure Time Sports is an unlevered firm with an aftertax net income of $78,400. The unlevered cost of capital is 11.4 percent and the tax rate is 23 percent. What is the value of this firm?

Answer 31

$687,719

The value of an unlevered firm is EBIT x (1-Tc) / Ro where Ro is the cost of capital. In this case the numerator is given (the net income does not include any interest as the firm is unlevered and the net income has already removed the tax expense so the net income number is the numerator. $78,400 / .114 = $687,719.298 if I round to the nearest whole dollar, the answer is $687,719.

Question 32

Salmon Inc. has debt with both a face and a market value of $227,000. This debt has a coupon rate of 7 percent and pays interest annually. The expected earnings before interest and taxes is $87,200, the tax rate is 21 percent, and the unlevered cost of capital is 12 percent. What is the firm’s cost of equity?

Answer 32

14.27 percent

This is a difficult question. We know we are trying to solve for the cost of levered equity, but using the MMII with taxes formula, we are missing the D/E ratio. We are given some information about the value of the debt but we must find the value of the equity by calculating firm value and subtracting the cost of the debt. The firm value is MMI with taxes: Value Levered Firm = (EBIT x (1-Tc)/Ro))+TcB. In this case the value of the firm is (87,200 x 0.79 / .12) + (.21 x $227,000) = $574,066.667 + $47,670 = $621,736.667. This is the value of the levered firm. If we subtract the value of the debt ($227,000) we know the value of the equity is $394,736.667. (These are all market, not book values.). The D/E is therefore $227,000 / $394,736.667 = 0.57506692. Now I have the variables necessary to use MMII with taxes to calculate the cost of levered equity. Rs = 12 + 0.57506692 (12 - 7) (1-.21) = 14.2715143, which rounds to 14.27%.

Question 33

Reena Industries has $138,000 of debt outstanding that is selling at par and has a coupon rate of 7 percent. If the tax rate is 21 percent, what is the present value of the tax shield on debt?

Answer 33

$28,980

The formula for the PV of the tax shield on debt is Tc x B. In this case, the Tc is 21%, then 138,000 x 0.21 = $28,980.

Note, this question is NOT asking the Annual Value of the tax shield. That is one of the answers, but that is not what this question is asking.

Question 34

The explicit costs, such as the legal expenses, associated with corporate default are classified as:

Answer 34

direct costs of financial distress.

Question 35

Which one of these is most related to a positive covenant?

A) Limiting the amount of the firm’s dividends
B) Avoiding a merger while a debt remains unpaid
C) Furnishing financial statements to the firm’s lenders
D) Not issuing any additional long-term debt
E) Not selling any major assets without lender approval

Answer 35

C) Furnishing financial statements to the firm’s lenders

Question 36

The Wiz Co. owes $60 to its bondholders for the payment of principal and interest. The company expects to have a cash flow of $136 if the economy continues as it is but that cash flow will decrease to $54 if the economy enters a recession. Should the company ever face the real possibility of bankruptcy, it will incur legal and other fees of $30. What amount will the bondholders be paid in the case of a recession?

Answer 36

$24

The bondholders have first claim on the firms cash flows. In the case the economy enters a recession, the firm’s cash available is $54 less the legal fees of $30. The bondholders would receive $54 - $30 = $24.

Question 37

It is easier to evaluate a firm using its financial statements when the firm:

Answer 37

uses the same accounting procedures as other firms in its industry.

Question 38

Projected future financial statements are called:

Answer 38

pro forma statements.

Question 39

The sustainable growth rate:

A) assumes there is no external financing of any kind.
B) is normally higher than the internal growth rate.
C) assumes the debt-equity ratio is variable.
D) is based on receiving additional external equity financing.
E) assumes the dividend payout ratio is equal to zero.

Answer 39

B) is normally higher than the internal growth rate.

Question 40

Southern Markets has sales of $78,400, net income of $2,400, costs of goods sold of $43,100, and depreciation of $6,800. What is the common-size statement value of EBIT?

Answer 40

36.35 percent

To calculate the common-sized value of EBIT in the income statement, we must divide EBIT by the sales or revenue figure (top line). Since EBIT is not given, we must calculate it. If we start with revenue and subtract COGS and depreciation, we get $28,500. This is the EBIT number. Note, in this case we can’t do a bottoms-up view because we are not given the interest expense to add back to net income. So the EBIT / revenue = $28,500 / $78,400 = 0.36352041 or 36.35% rounded to two decimal places.

Question 41

Northern Industries has accounts receivable of $42,300, inventory of $61,200, sales of $544,200, and cost of goods sold of $393,500. How many days, on average, does it take the firm to sell its inventory?

Answer 41

56.77

Average days in inventory is a formula given in the formula sheet and is calculated by dividing the inventory value by the daily COGS. So, $61,200 / (393,500/365) = 56.7675 days which rounds to 56.77 days.

Question 42

Discount Mart has $876,400 in sales with a profit margin of 3.8 percent. There are 32,500 shares of stock outstanding at a market price per share of $21.60. What is the price-earnings ratio?

Answer 42

21.08

In calculating the P/E ratio or multiple, I need to know two things. The price per share and the earnings per share. We know the market price is $21.60 per share. The company’s earnings or profits are $876,400 x 0.038 = $33,303.20. I must calculate the earnings per share, so I divide the above profit or earnings number by 32,500 to get $1.0247 EPS. The price/earnings ratio is $21.60 / $1.0247 = 21.0791, or rounded to two decimals 21.08 times.

Question 43

Brewster Mills has total revenues of $684,350, costs of goods sold of $472,500, net income of $11,520, and average inventory of $91,600. What is the days’ sales in inventory?

Answer 43

70.76 days

One day’s cost of sales is COGS/365, so $472,500 / 365 = $1,294.5205. That is the cost of sales revenue (or cost of goods sold) per day. If inventory is $91,600, then I would divide that number by the cost of sales per day to find the days sales in inventory. $91,600 / $1,294.5205 = 70.7598 or 70.76 days.

Question 44

Which of the following is not an example of the strategy and analytics focus on the new corporate financial focus:

A) Automating and standardizing data and systems
B) Analyzing data of all types to create insights
C) Creation of models and formulating strategy
D) Providing data to the Senior Executive Team

Answer 44

D) Providing data to the Senior Executive Team

Question 45

Based on observations from the past 5-10 years, finance teams are striving to focus more on the future and being proactive. While the IBM finance team of today spends roughly 70% of its time on strategy and future and the remaining 30% on compliance and reporting. How much was spent on compliance and reporting 25 years ago?

Answer 45

70%

Question 46

If you were a bank and wanted to better understand a firm’s current financial situation in order to assess their ability to repay a loan, which ratios would probably be most important to review and monitor?

Answer 46

Leverage and liquidity

Question 47

You have a portfolio comprised of two risky securities. This combination produces no diversification benefit. The lack of diversification benefits indicates the returns on the two securities:

Answer 47

move perfectly in sync with one another.

Question 48

MM Proposition I with taxes states that:

A) capital structure does not affect firm value.
B) increasing the debt-equity ratio increases firm value.
C) firm value is maximized when the firm is all-equity financed.
D) the cost of equity rises as the debt-equity ratio increases.
E) the unlevered cost of equity is equal to RWacc.

Answer 48

B) increasing the debt-equity ratio increases firm value.

Question 49

Ratios that measure a firm’s financial leverage are known as ________ ratios.

Answer 49

long-term solvency

Question 50

The financial ratio that measures the accounting profit per dollar of book equity is referred to as the:

Answer 50

return on equity.

Question 51

The average compound return earned per year over a multi-year period is called the ________ average return.

Answer 51

geometric

Question 52

If a firm increases its use of both operating and financial leverage, then you should expect the firm’s:

A) asset beta to exceed its equity beta.
B) beta of debt to exceed 1.0.
C) beta to remain constant as the increased operating leverage will offset the increased financial leverage.
D) equity beta to increase.
E) debt beta to exceed its equity beta.

Answer 52

D) equity beta to increase.

Question 53

An industry is likely to have a low beta if the:

A) stream of revenues within that industry is less volatile than the market.
B) economy is in a recessionary period.
C) market for its goods is highly affected by the market cycle.
D) number of firms within the industry is fairly constant.
E) industry tends to use a lot of debt financing.

Answer 53

A) stream of revenues within that industry is less volatile than the market.

Question 54

Lesco’s is evaluating a project that has a different level of risk than the overall firm. This project should be evaluated:

A) using the market beta. 
B)  using the overall firm's beta. 
C)  using a beta commensurate with the project's risks. 
D)  at the market rate of return. 
E)  at the T-bill rate of return.

Answer 54

C) using a beta commensurate with the project’s risks.

Question 55

When comparing levered versus unlevered capital structures, leverage works to increase EPS for high levels of EBIT because interest payments on the debt:

A) vary with EBIT levels.
B) stay fixed, leaving less income to be distributed over fewer shares.
C) stay fixed, leaving more income to be distributed over fewer shares.
D) stay fixed, leaving less income to be distributed over more shares.
E) stay fixed, leaving more income to be distributed over more shares.

Answer 55

C) stay fixed, leaving more income to be distributed over fewer shares.

Question 56

Corporations in the U.S., as compared to other countries, tend to:

Answer 56

underutilize debt.