Question

1.

One way of measuring the advantage of financial leverage to the owners of the company is ________.

A.

to examine the earnings per share (EPS) of a company after borrowing from debt lenders

B.

to examine the earnings per share (EPS) of a company before and after borrowing from debt lenders

C.

to examine the dividends per share (DPS) of a company before and after borrowing from debt lenders

D.

to examine the earnings per share (EPS) of a company before borrowing from debt lenders

2.

If earnings reflect a return greater than the cost of debt, then ________.

A.

the less debt the company has sold, the better off the shareholders are

B.

the more debt the company has bought, the better off the shareholders are

C.

the more debt the company has sold, the better off the shareholders are

D.

the more debt the company has sold, the worse off the shareholders are.

3.

A rising WACC ________ the values of the firm's future cash flows.

A.

increases

B.

has no effect on

C.

keeps constant

D.

reduces

4.

At the optimal

debtminus−tominus−equity

ratio, the cost of capital (WACC) is ________ for the firm. This point reflects the maximum benefit of leverage.

A.

at the midpoint

B.

the highest

C.

irrelevant

D.

the lowest

5.

True of False: Replacing equity financing with debt financing always leads to higher EPS.

a.True

b.False

Answer 1