Find the degree of operating leverage if sales are $350,000; variable costs are $200,000; fixed costs are $80,000; and interest expense is $20,000.

 

A.

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5

 

B.

4

 

C.

2.14

Lazy Clothes has expected earnings before interest and taxes (EBIT) of $48,900. The unlevered cost of capital is 14.5% and the tax rate is 34%. The firm also has $8000 in debt that has a 7% coupon. The debt sells at par value. Find the value of the levered firm

 

A.

$225,299

 

B.

$225,477

 

C.

$224,108

 

D.

$223,333

 

E.

$222,579

Welcome to a world with perfectly competitive markets! A levered firm has 60% equity and 40% debt for its capital structure. With this capital structure, the firm has earnings per share of $3.20. This is a no growth firm (so all earnings are paid as dividends). The return on assets is 12%, and the return on debt is 6%. What is the share price?

 

A.

15.24

 

B.

20.00

 

C.

26.67

 

D.

17.78

Firms tend to use less debt when

 

A.

Operating leverage is high

 

B.

Business risk is high

 

C.

They have many intangible assets

 

D.

All of the above

 

The direct costs of financial distress (such as legal fees) are higher than the indirect costs (such as game playing)

 True

 False

Tangible assets lose more of their value in bankruptcy than intangible ones

 True

 False

In a world with perfect capital markets, a levered firm and an unlevered firm have the same return on equity

 True

 False

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