Optimal Capital Structure (Multiple Chice)Finance

  1. The payment of dividends may indirectly result in closer monitoring of management’s investment activities, thus increasing shareholder value by (Points : 1)
    reducing agency costs.
    increasing information asymmetry.
    increasing a company’s amount of free cash flow.
    reducing auditing fees.
  2. A firm’s optimal capital structure occurs where? (Points : 1)
    EPS are maximized, and WACC is minimized.
    Stock price is maximized, and EPS are maximized.
    Stock price is maximized, and WACC is maximized.
    WACC is minimized, and stock price is maximized.

Bob’s Baked Goods Company reported the following income statement for 2009:
Sales $2,500,000
Variable Costs 900,000
Fixed Operating Costs 700,000
EBIT 900,000
Interest Expense 200,000
EBT 700,000
Taxes (30%) 210,000
Net Income $490,000
Earnings Per Share $4.90

If Bob’s sales next year increase by 20%, Bob’s EBIT will increase: (Points : 1)
20%, showing no operating leverage.
20%, showing no financial leverage.
over 35%, due to operating leverage.
over 35%, due to operating leverage and financial leverage.

  1. Which of the following will result from a stock repurchase? (Points : 1)
    Earnings per share will rise.
    Number of shares will increase.
    Corporate cash is conserved.
    Ownership is diluted.
  2. Moline Manufacturing Corporation reported the following items: Sales = $6,000,000; Variable Costs of Production = $1,500,000; Variable Selling and Administrative Expenses = $550,000; Fixed Costs = $1,350,000; EBIT = $2,600,000; and the Marginal Tax Rate =35%. Moline’s break-even point in sales dollars is (Points : 1)
  3. How frequently do corporations generally pay dividends? (Points : 1)
  4. What is the economic difference between a stock dividend and a stock split? (Points : 1)
    Stock splits create greater economic benefits to shareholders than stock dividends.
    Stock splits increase EPS more than stock dividends.
    There is no economic difference between a stock dividend and a stock split.
    Stock dividends create greater economic benefits to shareholders than stock splits.
  5. The break-even model enables the manager of the firm to (Points : 1)
    calculate the minimum price of common stock for certain situations.
    set appropriate equilibrium thresholds.
    determine the quantity of output that must be sold to cover all operating costs.
    determine the optimal amount of debt financing to use.
  6. Flotation costs: (Points : 1)
    include the fees paid to the investment bankers, lawyers, and accountants involved in selling a new security issue.
    encourage firms to pay large dividends.
    are encountered whenever a firm fails to pay a dividend.
    are incurred when investors fail to cash their dividend check.
  7. If a firm has no operating leverage and no financial leverage, then a 10% increase in sales will have what effect on EPS? (Points : 1)
    EPS will remain the same
    EPS will increase by 10%
    EPS will decrease by 10%
    EPS will increase by less than 10%
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