Problem Review Set Capital Structure and Leverage Essay Example for Free

Problem Review Set slap-up mental synthesis and Leverage EssayManagerial Finance Problem Review Set Capital Structure and Leverage If a tight utilizes debt financing, an X% decline in earnings before interest and taxes (EBIT) exit result in a decline in earnings per share that is larger than X. True b. fictional 2) Firm A has a higher degree of business run a risk than Firm B. Firm A can offset this by using less financial leverage. Therefore, the variability of both firms expected EBITs could real be identical. 3) It is possible that two firms could have identical financial and operating leverage, yet ave different degrees of risk as measured by the variability of EPS. ) Which of the following events is likely to encourage a company to impose its target debt ratio, other things held constant? An increase in the corporate tax rate. An increase in the person-to-person tax rate. An increase in the companys operating leverage. d. The Federal Reserve tightens interest rat es in an move to fight inflation. e. The companys stock price hits a new high. 5) The firms target capital structure should be reconciled with which of the following statements? Maximize the earnings per share (EPS). asperse the cost of debt (rd).Obtain the highest possible bond rating. Minimize the cost of equity (rs). Minimize the weighted average cost of capital (WACC). 6) Which of the following statements isAs a firm increases the operating leverage used to produce a given quantity of output, this will normally execute to an increase in its fixed assets turnover ratio. b. normally lead toa drop-off in its business risk. normally lead to a decrease in the standard deviation of its expected 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 before long 100% equity financed. The CFO is considering a recapitalization plan under which the firm would issue long-term debt with a yield of 9% and use the proceeds to repurchase common stock. The recapitalization would not change the companys total assets, nor would it profess the firms basic earning power, which is currently 15%. The CFO believes that this recapitalization would ikely to occur if the company goes ahead with the recapitalization plan?