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# Leverage, TVM, Capital Budgeting, International Finance

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#1 If the variable cost per unit increases while the sales price per unit and total fixed costs remain constant, the _______________.
a. break-even point increases
b. break- even point decreases
c. break- even point remains the same
d. contribution margin increases

#2 Financial leverage is ________________.
a. the extent to which fixed assets and associated fixed costs are used in business
b. the percentage change in operating income that occurs as a result of a percentage change in units sold
c. the amount of debt used in the capital structure of a firm.
d. the impact of change in sales or volume on bottom line earnings per share.

#3 What is the difference between financial leverage and operating leverage?

#4 Which of the following is a fixed cost?
a. direct materials
b. straight line depreciation
c. sales commissions

#5 Moe & Chris's Delicious Burgers sells food to University Cafeterias for \$15 a box. The fixed costs of this operation are \$80,000, while the variable cost per box is \$10.
a. What is the break even point in boxes? _____
b. Calculate the profit or loss on 15,000 boxes.______
c. What is the degree of operating leverage at 20,000 boxes?
(DOL = Q(Price - Var cost) divided by Q ( Price-var cost) - Fixed cost
d. If the firm has an annual interest expense of \$10,000, calculate the degree of financial leverage at 20,000 boxes.
(DFL = Earnings before interest and tax (EBIT) divided by EBIT - Interest)

#6 Time value of money is based on the belief that a dollar that will be received at some future date is worth more than a dollar today. True or False.

#7 The future value of \$100 received today and deposited in an account for four years paying semiannual interest of 6 percent is: (Hint, it is a semi-annual payment so you must set your calculator to 2 payments per year. Also, your "n" will need to reflect 2 payments per year.)
a. \$450
b. \$126
c. \$889

#8 The present value of \$200 to be received 10 years from today, assuming an opportunity cost of 10 percent is _______.
a. \$50
b. \$200
c. \$77

#9 The _____ value of a bond is also called it face value. Bonds which sell at less than face value are priced at a ________, while bonds which sell at greater than face value sell at a _________.

#10 In general, the more working capital a firm has _________.
a. the greater its risk
b. the lower its risk
c. the less likely creditors are to lend to the firm

#11 The __________is the time period that elapses from the point when the firm makes the outlay to purchase raw materials on account, to the point when payment is made to the supplier of goods.
a. cash conversion cycle
b. average payment period
c. average age of inventory
d. average collection period

#12 A firm can reduce its cash conversion cycle by______________.
a. increasing the average collection period
b. increasing the average payment period

#13 An increase in collection efforts will result in _______in sales volume, ________ in the investment in accounts receivable,__________in bad debt expenses and ________ in collection expenses.
a. an increase; a decrease; an increase; a decrease
b. an increase; a decrease; a decrease, an increase
c. a decrease; a decrease; a decrease; an increase

#14 (Payback & NPV) A project that costs \$2,500 to install will provide annual cash flows of \$600 for the next 6 years. The firm accepts projects with payback periods of less than 5 years.
Will the project be accepted based on the payback requirement?
What is the NPV of this project if the discount rate is 2 percent?
Should it be pursued?

#15 The current price of DEF Corp. is @26.50 per share. Earnings next year should be \$2 per share. The P/E multiple is 15 times on average. What price would you expect DEF to be?
a. \$13.50
b \$15.00
c. \$30.00

#16 As the volume of financing increases in a firm, the costs of the various types of financing will ________, ________ the firm's weighted average cost of capital.
a. increase; lowering
b. increase; raising
c. decrease; raising

#17 Micro Spinoff Company is in the 35% tax bracket. Its cost of preferred stock is 10%. Its cost of debt is 7.5%. Suppose Micro Spinoff's cost of equity is 12 percent. What is its WACC if equity is 50 percent, preferred stock is 20 percent and debt is 30 percent of total capital?

#18 Dividend Yields and Capital Gains: A stock is selling today for \$40 per share. At the end of the year, it pays a dividend of \$2 per share and sells for \$44.
What is the dividend yield ____
and capital gains yield?____
What is the total rate of return on the stock?_____

#19 Buy versus Lease. You can buy a car for \$25,000 and sell it in 5 years for \$5,000. Or you can lease the car for 5 years for \$5,000 a year. The discount rate is 12 percent per year.
a. Which option do you prefer?
b. What is the maximum payment amount you should be willing to pay to lease rather than buy the car?

#20 Constant growth model: You believe that the Non-stick Gum CO. will pay a dividend of \$2 on its common stock next year. Thereafter, you expect dividends to grow at a rate of 6 percent a year in perpetuity. If you require a return of 12 percent on your investment, how much should you be prepared to pay for the stock? Hint: initial price= div1/r-g

#21 Fluctuations in foreign exchange markets can affect foreign revenues and profits of a multinational company, but they have no impact on its overall value. True or false?

#22 The three basic types of risk associated with international cash flows are business and financial risks, inflation and foreign exchange risk and political risk. True or False?

#### Solution Preview

#1 If the variable cost per unit increases while the sales price per unit and total fixed costs remain constant, the _______________.
a. break-even point increases
b. break- even point decreases
c. break- even point remains the same
d. contribution margin increases

break even units = Fixed cost / Contribution; contribution is decreasing

#2 Financial leverage is ________________.
a. the extent to which fixed assets and associated fixed costs are used in business
b. the percentage change in operating income that occurs as a result of a percentage change in units sold
c. the amount of debt used in the capital structure of a firm.
d. the impact of change in sales or volume on bottom line earnings per share.

Answer: c. the amount of debt used in the capital structure of a firm.
n

#3 What is the difference between financial leverage and operating leverage?

Operating leverage is the use of fixed operating costs by the firm to increase EBIT, while
Financial leverage is the use of fixed financing costs by the firm to increase EPS.

#4 Which of the following is a fixed cost?
a. direct materials
b. straight line depreciation
c. sales commissions

#5 Moe & Chris's Delicious Burgers sells food to University Cafeterias for \$15 a box. The fixed costs of this operation are \$80,000, while the variable cost per box is \$10.
a. What is the break even point in boxes? 16,000
Contribution= \$15-\$10 =\$ 5 a box
Fixed cost =\$80,000
Therefore, break even point = \$80,000/\$5 = 16,000

b. Calculate the profit or loss on 15,000 boxes. Loss = (\$5000)
Contribution = 15,000 x \$ 5= \$75,000
Fixed Cost= \$80,000
Therefore, loss= \$75,000-\$80,000 = (\$5000)

c. What is the degree of operating leverage at 20,000 boxes? 5
(DOL = Q(Price - Var cost) divided by Q ( Price-var cost) - Fixed cost

DOL = 20,000 (\$15-\$10) / {20,000 (\$15-\$10) -\$80,000} =\$100,000/ (\$100,00-\$80,000)=5

d. If the firm has an annual interest expense of ...

#### Solution Summary

Answers to multiple choice questions on Operating and Financial Leverage, TVM, Capital Budgeting, International Finance

\$2.19