Financial Management Exam
an optimal - correct answers__________ capital structure refers to a combination of
debt and equity that maximizes the value of the firm.
cost to the borrower - correct answers the return to the investor is the _____________
Financial leverage - correct answers________ is the degree to which a firm or
individual utilizes borrowed money to make money
borrowed money to magnify equity earnings - correct answers Financial leverage is
the degree to which a firm or individual utilizes _________
to examine the earnings per share (EPS) of a company before and after borrowing
from debt lenders - correct answers One way of measuring the advantage of
financial leverage to the owners of the company is ______.
the more debt the company has sold, the better off the shareholders are - correct
answers If earnings reflect a return greater than the cost of debt, then _______.
Company 1 has an EPS of $2.00 and Company 2 has an EPS of $2.50. - correct
answers Consider two companies in a world with no taxes that are alike except in
borrowing choices. Company 1 has no debt financing, and Company 2 uses debt
financing. The EBIT for both companies is $1,000. Company 1 has 500 shares
outstanding and pays no interest. Company 2 has 300 shares outstanding and pays
$250 in interest. What is the EPS for each company?
All−equity
EPS = $0.75, leveraged−equity EPS = $0.787 - correct answers Fresh out of
Harvard Business School, John Thompson, the new CFO of Joe's Southern Cornbread
Company, wants to shake things up at the sleepy little food company
headquartered in Birmingham, Alabama. The firm is currently an all−equity firm
because "that's the way we've always done it." Under pressure from a new group of
major stockholders, however, Walker is considering acquiring some debt (leverage)
in an effort to boost earnings per share. The company currently has 8000 shares of
