Sophia Principle of Finance Milestone Study Guide Revisions 1

Sophia Principles of Finance Unit 3 Challenge 4 1 — Capital Structure Considerations One reason a company's capital structure may include more equity than debt is that relying too heavily on debt could __________. increase the company's risk of bankruptcy 2 — Understanding the Bankruptcy Process Select the true statement about Chapter 11 bankruptcy. Under Chapter 11, a company may be able to continue its operations, but with a potentially higher cost of capital. 3 — Thinking About Operating Leverage You own a small manufacturing business that produces widgets. You have spent $200,000 acquiring the fixed assets you need to produce widgets. Each widget costs you $4 to make and they sell for $20 each, so your variable cost is 20% of the overall revenue. At your current level of operating leverage, how many widgets must you sell to break even? 12,500 4 — Thinking About Financial Leverage Calculate a company's total leverage given the following information: Net income = $35,000 Revenue = $70,000 Variable costs = $15,000 1.57