Question

TRUE OR FALSE ______ 5. A firm’s “Weighted Average Cost of Capital” (WACC) typically increases as the volume of new capital raised within a given time period increases. ______ 6. Breakeven analysis is used to determine the level of operations necessary to cover all operating costs. ______ 7. An increase in either the firm’s fixed costs (FC) or its variable costs (VC) will cause the firm’s operating breakeven point (OBP) in “units” to decrease. ______ 8. In general, non-U.S. companies have much higher levels of indebtedness than do firms headquartered in the U.S.

Answer 1

5) TRUE

WACC is depend on the mix of debt and equity. Increase in capital (equity) will increase proportion of equity and cost of equity is generally higher than cost of debt. Hence increase in equity proportion typically increases the WACC

6) TRUE

Breakeven analysis calculate the minimum number of units company should produce to cover up all the fixed and variable cost and start generating the profit.

7) FALSE

As breakeven point analysis formula is (Fixed cost / (Selling price per unit - Variable cost per unit). Since fixed cost is in numerator, increase in Fixed cost will results in increase in number of breakeven units. Also as per the formula, increase in variable cost per unit, will decrease the denominator, hence will increase the number of breakeven units

8) FALSE

Typically level of indebtedness of any company is generally depend on which industry it is operating (capital intensive or capital light) and also needs of the company. We cannot generalized the non-US companies has very high indebtedness than companies in the US