Which of the following is an indication of a firm's risk with its capital structure?

Indifference point

Coefficient of variation

Earnings per share

Net operating income

Weighted average cost of capital

Which of the following is an advantage of debt financing?

Interest charges on debt is very minimal.

Interest charges on debt are tax deductible.

Interest charges on debt are based on the net income of the firm.

The higher the interest charges, the lower the bankruptcy costs.

Firms that are entirely debt financed have to pay very minimal taxes.

Which of the following is an example of business risk?

Default risk

Prepayment risk

Strategic risk

Currency risk

Equity risk

The percentage change in earnings per share (EPS) that results from a given percentage change in sales is known as the _____.

degree of financial leverage

degree of operating leverage

degree of working capital leverage

degree of current asset leverage

degree of total leverage

Question

Which of the following is an indication of a firm's risk with its capital structure?

Indifference point

Coefficient of variation

Earnings per share

Net operating income

Weighted average cost of capital

Which of the following is an advantage of debt financing?

Interest charges on debt is very minimal.

Interest charges on debt are tax deductible.

Interest charges on debt are based on the net income of the firm.

The higher the interest charges, the lower the bankruptcy costs.

Firms that are entirely debt financed have to pay very minimal taxes.

Which of the following is an example of business risk?

Default risk

Prepayment risk

Strategic risk

Currency risk

Equity risk

The percentage change in earnings per share (EPS) that results from a given percentage change in sales is known as the _____.

degree of financial leverage

degree of operating leverage

degree of working capital leverage

degree of current asset leverage

degree of total leverage

		If a firm is exposed to a high degree of business risk as a result of its high operating leverage, then it probably should offset this risk by using a larger-than-average amount of financial leverage. This follows because debt has a lower after-tax cost than equity.
		Financial risk can be reduced by replacing common equity with preferred stock.
		The Hamada equation specifies the effect of financial leverage on beta. It shows how increases in the debt/equity ratio lowers beta.
		In the textbook, it was stated that the capital structure that minimizes the WACC also maximizes the firmâs stock price and its total value, but generally not its expected EPS. One reason given for why debt is beneficial is that it shelters operating income from taxes, while it was stated that a disadvantage of excessive debt has to do with costs associated with bankruptcy and financial distress generally.
		All of the above statements are false.

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