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# finance MC questions: optimal capital, risk types, leverage

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Question 1

The optimal capital structure is that structure which:

reduces overall leverage

reduces or eliminates only financial leverage

gives the highest stock price

provides the best risk versus return scenario for investors

carries extra options for timing and future events.

Question 2

Select the best combination below of risk as it relates to a company's sales and a company's profits.

financial risk / business risk

foreign exchange risk / interest rate risk.

business risk / financial risk.

business risk / interest rate risk.

interest rate risk / investment risk.

Question 3

Operating leverage targets

the percent of costs that are fixed

the usage of labor.

outsourcing

variable costs

Question 4

Fill in the blank. Considering one industry, all firms must have _________ capital structures to be optimal.

identical

similar

dissimilar

any number of combinations of

Question 5

Capital rationing is:

the allocation of available capital to projects best suited to be undertaken, at the present time.

Applying an even distribution of capital; all departments get the same funding.

Applying a distribution of capital based on the % of profits generated by each department.

borrowing conservatively.

none of the above.

Question 6

As operating leverage increases, all things being equal,

the lower the break even point will be

variable costs per unit will decrease

the higher the sales volume needed to break even.

variable costs per unit will increse

all of the above.

Question 7

If the analytical results of projects "N" and "M" are:
M: NPV = \$450, IRR 12%
N: NPV = \$500, IRR = 12%
Which of the following would be correct?

Your company has an historical return for its shareholders at 15%; therefore, both projects are rejected.

If they are mutually exclusive, you would reject "N".

If they are not mutually exclusive, you can accept both because they have a positive NPV.

Reject both because there is no way both can have the same IRR with different NPV's.

"A" and "C" are correct answers.

Question 8

Which of the following is not considered a "real option"?.

flexibility

growth

timing

replacement

abandonment

Question 9

The concept of sunk costs is most associated with which of the following:

Baywatch

abandonment costs or options to abandon if you decide to do something else.

Working capital needed to start a business

Net after tax but before interest and principal payments.

none of these!

Question 10

Which of the following is not an example of a real option?

Quitting a job

Leaving school before you graduate

Paying off a debt obligation early

dropping one quiz grade in this course

renting an asset instead of buying that asset

Question 11

What is the after-tax cost of debt for a firm in the 35% tax bracket that pays 15% on its debt?

5.25%

9.75%

12.17%

20.25%

Question 12

A project has the following projected outcomes in dollars: \$250, \$350, and \$500. The probabilities of their outcomes are 25%, 50%, and 25% respectively. What is the expected value of these outcomes?

\$362.5

\$89.4

\$94.5

\$178.3

Question 13

Financial risk refers to the:

risk of owning equity securities.

risk faced by equity holders when debt is used.

general business risk of the firm.

possibility that interest rates will increase.

Question 14

A firm's capital structure is represented by its mix of:

assets.

liabilities and equity.

assets and liabilities.

assets, liabilities and equity.

Question 15

Risk is usually measured as the :

potential loss.

variability of outcomes around some expected value.

probability of expected values.

potential expected loss.

Question 16

What is the return on equity for a firm with 15% return on assets, 10% return on debt, and a .75 debt/equity ratio?

18.75%

20.00%

23.75%

26.25%

Question 17

An increase in a firm's financial leverage will:

increase the variability in earnings per share.

reduce the operating risk of the firm.

increase the value of the firm in a non-MM world.

increase the WACC.

Question 18

Which of the following could SIGNAL to investors that the future prospects of the company are bright?

Borrow significantly more money (increase financial leverage).

Sell new equity shares in the open market.

Sell stock the company had listed as Treasury Stock.

Pay down debt.

all of the above.

Question 19

Trade off theory of leverage relates

returns to stock holders as bond leverage increases

returns to both owners and debt holders as leverage increases

operating versus financial aspects of leverage

commission costs associated with equity (stock. trading versus bond trading

tax benefits of debt versus increase chance of defaulting on debt.

Question 20

Which of the following is an example of restructuring the firm?

Dividends are increased from \$1 to \$2 per share.

A new investment increases the firm's business risk.

New equity is issued and the proceeds repay debt.

A new Board of Directors is elected to the firm.

Question 21

The stability of a firm's operating income is the focus of:

financial leverage.

weighted-average cost of capital.

capital structure.

business risk.

Question 22

The capital asset pricing model (CAPM.:

uses the risk free rate

relates risk versus return

uses a premium for added risk

all of the above

none of the above

Question 23

Optimal Capital structure is:

easily attained; just plug in variables to the formula.

achieved through trial and error by leveraging financial assets.

static once the optimal point is reached.

a great academic discussion but cannot be determined in dynamic financial markets for any given period of time.

constant, but each industry, as defined by NAICS, has its own debt/equity mix.

Question 24

Asymmetric information occurs when:

all parties have complete information

one party has less information than the other.

all analysts agree about future earning predictions

No one has any information

none of the above

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#### Solution Summary

This solution is comprised answers to finance multiple choice mostly in the capital structure topicl.

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