Problem Review Set Capital Structure and Leverage Essay

Managerial finance Problem Review Set upper-case letter Structure and Leverage If a degenerate utilizes debt financing, an X% decline in hire before vex and task revenuees (EBIT) will result in a decline in requital per share that is larger than X. genuine b. False 2) Firm A has a higher degree of trading riskiness than Firm B. Firm A depose offset this by using little financial leverage. Therefore, the variability of both substantials expect EBITs could actually be identical. 3) It is possible that ii degradeds could have identical financial and run leverage, yet ave different degrees of risk as measured by the variability of EPS. ) Which of the next events is likely to encourage a fellowship to raise its target debt ratio, other things held uninterrupted? An augment in the corporate tax rate. An increase in the personal tax rate. An increase in the participations operating leverage. d. The Federal Reserve tightens interest rates in an effort to booking infl ation. e. The companys stock harm hits a new high. 5) The firms target capital structure should be consistent with which of the following statements? Maximize the earnings per share (EPS). Minimize the salute of debt (rd). begin the highest possible bond rating. Minimize the cost of equity (rs). Minimize the weighted honest cost of capital (WACC). 6) Which of the following statements isAs a firm increases the operating leverage use to produce a given touchstone of output, this will normally lead to an increase in its fixed assets overturn ratio. b. normally lead toa decline in its business risk. normally lead to a decrease in the standard deviation of its pass judgment EBIT. d. ormally lead to a decrease in the variability of its expected EPS. e. ormally lead to a reduction in its fixed assets turnover ratio. 7) Reynolds Resorts is currently 100% equity financed. The chief financial officer is considering a recapitalization plan under which the firm would issue long-term debt with a interpret of 9% and use the proceeds to purchase common stock. The recapitalization would not change the companys total assets, nor would it affect the firms basic earning power, which is currently 15%. The CFO believes that this recapitalization would ikely to occur if the company goes earlier with the recapitalization plan?