Finance - Multiple Choice Questions

1. The ________ is a weighted average of the cost of funds which reflects the interrelationship of financing decisions.

1. 1. risk-free rate
2. 2. nominal cost
3. 3. risk premium
4. 4. cost of capital

2. The firm's optimal mix of debt and equity is called its

1. 1. optimal ratio.
2. 2. maximum wealth.
3. 3. target capital structure.
4. 4. maximum book value.

3. If a corporation has an average tax rate of 40 percent, the approximate annual, after-tax cost of debt for a 10-year, 8 percent, $1,000 par value bond selling at $1,150 is

1. 1. 4.8 percent.
2. 2. 3.6 percent.
3. 3. 6 percent.
4. 4. 8 percent.

4. A corporation has concluded that its financial risk premium is too high. In order to decrease this, the firm can

1. 1. decrease the proportion of common stock equity to decrease financial risk.
2. 2. increase short-term debt to decrease the cost of capital.
3. 3. increase the proportion of long-term debt to decrease the cost of capital.
4. 4. increase the proportion of common stock equity to decrease financial risk.

5.________ leverage is concerned with the relationship between sales revenue and earnings per share.

1. 1. Operating
2. 2. Financial
3. 3. Total
4. 4. Variable

6.Breakeven analysis is used by the firm

1. 1. none of these.
2. 2. Both to determine the level of operations necessary to cover all operating costs and to evaluate the profitability associated with various levels of sales.
3. 3. to determine the level of operations necessary to cover all operating costs.
4. 4. to evaluate the profitability associated with various levels of sales.

7.Noncash charges such as depreciation and amortization ________ the firm's breakeven point.

1. 1. understate
2. 2. decrease
3. 3. overstate
4. 4. do not affect

8.If a firm's fixed operating costs decrease, the firm's operating breakeven point will

1. 1. decrease.
2. 2. change in an undetermined direction.
3. 3. increase.
4. 4. remain unchanged.

9.________ is the potential use of fixed operating costs to magnify the effects of changes in sales on earnings before interest and taxes.

1. 1. Ratio analysis
2. 2. Operating leverage
3. 3. Total leverage
4. 4. Financial leverage