Question Details

capital structures across industries




1. If a firm utilizes debt financing, a decrease in earnings before interest and taxes (EBIT) will result in a more than proportionate decrease in earnings per share.
A) True B) False

2) The second step in estimating a firm- WACC is:
a. Estimate the project's WACC (which includes both business risk and the effects of capital structure) by using WACC = r - [T*Lrd(1+r) / (1+rd)] where r is given in the previous step and following estimates for the firm that is considering the investment.
b. Use the parameter estimates in the previous step to estimate H, WACC, and r.
c. Use from the previous step the estimates of r from comparable firms to estimate a single r for the project reflecting its business risk.
d. Estimate the project's WACC (which includes both business risk and the effects of capital structure) by using WACC = r - [T*Lrd(1+r) / (1+rd)] where r is given in the previous step and following estimates for the firm that is considering the investment.
e. Choose one or more comparable firms that are similar to the project in risk and industry characteristics and have publicly traded securities.
b. Estimate values in the WACC formula for each comparable firm.

3) A firm in a highly cyclical industry should set higher interest coverage and fixed-charge coverage ratio standards to compensate for the greater operating risk.
a. True b. False

4) Studies show systematic differences in capital structures across industries. These are due mostly to differences in ________.
A) what the arbitrage pricing theory tells us
B) hiring and firing practices
C) the availability of tax shelter provided by things other than debt, such as accelerated depreciation, investment tax credit, and operating tax loss carryforwards
D) none of the above

5) The use of debt in the firm's capital structure is called ________.
A) operating leverage B) homemade leverage
C) financial leverage D) decreasing leverage
E) none of the above






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