Variable Cost and Capital Structure

1548 Words Mar 1st, 2014 7 Pages
1. Which of the following would increase the likelihood that a company would increase its debt ratio in its capital structure?
a. An increase in costs incurred when filing for bankruptcy.
b. An increase in the corporate tax rate.
c. An increase in the personal tax rate.
d. None of the statements above is correct.

ANSWER: B An increase in the corporate tax rate would mean that firms would get larger tax breaks for interest payments. Therefore, firms have an incentive to increase interest payments, in order to reduce taxes. Therefore, they will increase their debt ratios.

2. Which of the following events is likely to encourage a company to raise its target debt ratio? a. An increase in the corporate tax rate. b. An increase in the
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a. Below the indifference or break-even point in EBIT the non-levered structure is superior. b. Financial leverage increases the slope of the EPS line. c. Above the indifference or break-even point the increase in EPS for all equity plans is less than debt-equity plans. d. Above the indifference or break-even point the increase in EPS for all equity plans is greater than debt-equity plans.
ANSWER: D

11. Cranberry Wood Products Inc. spends an average of $9.50 in labor and $12.40 in materials on every unit it sells. Sales commissions and shipping amount to another $3.10. All other costs are fixed and add up to $140,000 per month. The average unit sells for $32.00. What is the firm's breakeven point in units?

a. 10,000
b. 20,000
c. 30,000
d. 15,000

ANSWER: B Variable cost per unit = V = Labor + Material + C&S V = $9.50 + $12.40 + $3.10 = $25.00 Ct = P  V =$32  $25 = $7.00 QB/E = FC/Ct = $140,000/$7 = 20,000

12. The Spitfire Model Airplane Company has the following modified income statement ($000) at 100,000 units of production. Revenue $10,000 Variable Cost 6,500 Fixed Cost 2,200 EBIT $ 1,300 Interest (@ 10%) 500 EBT $ 800 Tax (@ 40%) 320 EAT $ 480 # shares 20,000 What is Spitfire's current DOL?

a. 2.692
b. 2.766
c. 4.201
d. 3.009

ANSWER: A

13. Watson Waterbed Works Inc. has an EBIT of $2.75 million,