test ch5&6 Flashcards by Michaela Schultz

a highly automated plant would generally have

more fixed than variable costs

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combined leverage is concerned with the relationship between

the changes in volume and changes in EPS

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If TechCore has fixed costs of $60,000, variable costs of $1.20/unit, a sales price/unit of $7, and depreciation expense of $25,000, what is its cash break-even in units?

$6,034 units

Cash BE = FC - Depreciation/P-VC

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A conservative financing plan involves

a heavy reliance on equity

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what does a DFL of 1.25 mean?

For every 1% change in EBIT, the firm will experience a 1.25% change in EPS in the same direction

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variable operation costs vary directly with sales

true

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Financial leverage determines how the operation of a business is financed

true

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ABC cables, the maker of Yellow Widgets cable accessories, has an EBIT of $10,000 for the year, Interest on its debt of $12,000, taxes of $3,500, and preferred dividends of $2,400. If there are 1000 shares outstanding, what is the EPS?

$2.10

EPS = $2,100/1000=2.10

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The breakeven point is where fixed expenses equals total revenue

false

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the most common financial costs include interest on debt and preferred stock

false

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What is the CM if variable costs are $650 and the price for each unit sold is $1000?

350
CM = unit sales price - TVC

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the numerical measure of a firm’s total leverage is DTL

true

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all costs between sales and EBIT are operating costs

true

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a firm has fixed costs of $75K, a sales price of $7, and a break even point of 25,000 units, the variable cost per unit is….

$4.00
VC = P - (FC / BE point)
25,000 = 75,000/ (7-VC)

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DTL (or DCL) = DOL * DFL?

true

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the break even point in units is calculated by dividing FOC by the UCM

true

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What percentage change in sales if sales increase from $160,000 to $200,000? And will this impact EBIT or EPS?

25% and both

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ABC cables has an EBIT of $10,000 for the year and EPS of $2.40 if EBIT increases 30%, and interest on its debt of $2,000 and taxes of $3,200, and preferred dividends of $2,400 if there are 1000 shares outstanding what is EPS?

$4.20

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alpha metAL LLC HAS A DOL of 3.0 and EBIT of $20,000. what is the EBIT if sales increase by %2?

$21,200
DOL= %change in EBIT/ %change in sales
—> initial EBIT x (1 + .06)

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Plan A and Plan B at an EBIT level of $36,000. Plan A calls for $12,000 of interest at all levels of financing and plan B requires $4,000. plan a has a DFL of 1.5 and plan b has a 1.1, which company is employing more leverage?

company A

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variable costs are the direct production costs that, unlike fixed costs, vary according to levels of production or sales, and fixed assets are associated with the basic operating and overhead expenses of a business

true

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a DOL of 2.7X implies that if sales increased by 10% operating income will change by 2.7%

true

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if the percent change in unit volume is 25% and the percent change in operating income is 66.67% the DOL is 2.67%

false
(Not a percentage!)

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DOL is the percentage change in operating income that occurs as a result of a percentage change in units sold

true

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if fixed operating expenses is $25K, and depreciation expense is $5K and CSG is 65% of total sales what is the Breakeven point in sales

$57,142.86 (none of the answers)

Unit price minus unit total operating cost = unit contribution margin

false

operating leverage measures how revenue growth translates into growth in operating income

true

as a company increases fixed expenses, its operating leverage decreases. the higher the fixed expense, the higher the operating leverage

false

there are three types of operating costs

false

if XYZ has a sale price of $800 per unit and has recently expanded, its operations with fixed costs of $16,000 and each unit cost $400 to produce what is the breakeven point?

40 16000/(800-400)=40

depreciation reduces the number of units needed to breakeven

true

cmu = sales price - vc

true

the degree of financial leverage is the ratio between EPS and EBIT. if the factor is less than 1 the finance leverage exists

false

the term structure of interest rates

all options are correct. will be upward sloping under normal conditions, will be downward sloping if short term interest rates are higher than long term rates, is an indication of investors' expectations about inflation and future interest rates

Samuelson will produce 20,000 units in January using level production. If each unit costs $500 to manufacture, what is the dollar value of ending inventory in January if beginning inventory is 10,000 units and January sales are 15,000?

between $5,000,000 and $10,000,000 beginning inventory + production - sales = ending inventory

the term "permanent current assets" implies

some minimum level of current assets that are not self liquidating

when yield curve is upward sloping, generally a financial manager should

utilize long-term financing

under normal conditions (70% probability), Plan A will produce a $20,000 higher return than Plan B. Under tight money conditions (30% probability), Plan A will produce $100,000 less than Plan B. What is the expected value of return?

($16,000)

The theory of the term structure of interest rates, which suggests that long-term rates are determined by the average of short-term rates expected over the time that a long-term bond is outstanding is the

expectations hypothesis

a firm will usually increase the ratios of long-term debt to short term debt when

future interest rates are expected to increase

if a firm uses level production with seasonal sales and sales decline further than expected

inventory will increase

when actual sales are greater than production

all the options are true inventory will decline, accounts receivable will rise, production schedules might have to be revised upward

working capital management is primarily concerned with the management and financing of

current assets and current liabilities

the concept of a self liquidating asset implies that

all the product will be sold, receivables collected, and bills paid over the time period specified

ideally which type of assets should be financed with long-term financing?

fixed assets and permanent current assets

RDIF chips have been used to

all options are true track livestock, track inventory at retailers, track marathon runner times

the belief that investors require a higher return to entice them into holding long-term securities is the viewpoint of the

liquidity premium theory

in company XYZ assume that level production happens throughout the year and that receivables are collected in two equal installments over a two-month period after the sales period. if XYZ wants to develop a cash budget, which of the following steps is required?

estimate monthly net cash flow and bank borrowing or repayments

Working capital management is primarily concerned with the management and financing of...

current assets and current liabilities

pressure to increase current asset buildup often results from..

rapidly expanding sales

ideally, which of the following types of assets should be financed with long-term financing?

fixed assets and permanent current assets

the concept of a self-liquidating asset implies that

all the product will be sold receivables collected, and bills paid over the time period specified

one advantage of level production is that

manpower and equipment are used efficiently at lower cost

Sameulson's beginning inventory balance on January 1 is 12,000 units and it desires an ending balance of 20% of next month's sales. if sales are expected to be 17,000 for January and 20,000 for February, how many units should be produced during January?

9,000 calculate ending inventory for jan calculate total units needed for jan calc. amount of units to produce: units needed - beginning inventory= units to produce

if XYZ wants to develop a cash budget, what following step is required?

estimate monthly net cash flow and bank borrowing or repayments

generally more use is made of short term financing because

short term interest rates are usually lower than long term interest rates and most firms do not have basic access to the capital markets

the theory of the term structure of interest rates, which suggest that long term rates are determined by the average of short term rates expected over the time that a long term bond is outstanding is the

expectations hypothesis

the belief that investors require a higher return to entice them into holding long-term securities is the viewpoint of the

liquidity premium theory

a conservatively financed firm would

use long term financing for three items: permanent current assets, fixed assets, and a portion of the short term fluctuating assets. Then use short term financing for all other short term assets.

which of the following techniques allows explicit consideration of more than one possible outcome?

expected value

the break even point is where fixed expenses equals total revenues

false

operating leverage reflects the extend to which fixed assets and associated fixed costs are utilized in the business

true

a high DOL reveals that the company's fixed costs exceed the variable costs. it indicates that the company can boost its operating income by increasing its sales

true

DOL =

DOL = % change in EBIT / % change in volume sales

DFL =

DFL = % change in EPS / % change in EBIT