16 x11 FinMan D

16 x11 FinMan D - FinancialManagement (D.Risk&Leverage)...

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Financial Management D. RISK AND LEVERAGE THEORIES: Risk Business risk Financial risk 12. Financial risk refers to the: A. risk of owning equity securities B. risk faced by equity holders when debt is used C. general business risk of the firm D. possibility that interest rates will increase Market risk Comprehensive 5. A decrease in the debt ratio will least likely affect: A. Financial risk C. Systematic or market risk B. Business risk D. Total risk 14. Which of the following situations is likely to have the highest combined business and financial risk impact upon a business? A. A new labor-intensive operation is funded with operating cash flows B. A fully automated plant is completed, funded with retained earnings C. A fully automated plant is completed, funded with the issuance of 10- year bonds D. An automated, but dated plant in the southern region is closed and operations are resumed in a labor-intensive plant in Central Luzon Operating Leverage 2. Which of the following is a key determinant of operating leverage? A. Level of debt C. Technology B. Cost of debt D. Capital structure 3. The degree of operating leverage for Alabang Company is 3.5, and the degree of operating leverage for Paranaque Corporation is 7.0. According to this information, which firm is considered to have greater business risk? A. Alabang Company. B. Paranaque Corporation. C. The degree of operating leverage is not a measure of business risk, so it is not possible to tell which firm has the greater business risk given the above information. D. To determine which firm has the greater business risk, we need to know the operating income (NOI or EBIT) of each firm. Paranaque Corporation would have less business risk if its operating income is at least twice that of Alabang Company. 9. Which of the following is incorrect regarding operating leverage? A. Operating leverage is the degree to which costs are fixed. B. A project's break-even point will be affected by the extent to which costs can be reduced as sales decline. C. If the project has mostly variable costs, it is said to have high operating leverage. D. High operating leverage implies that profits are more sensitive to changes in sales. 11. The extent to which fixed costs are used in a firm’s operations is called its: A. financial leverage. C. financial leverage. B. operating leverage. D. foreign risk exposure. Financial Leverage 4. It refers to management strategy of financing assets with borrowed capital; such an extensive use raise the entity risk thereby impacting on the return on common stockholders’ equity to be above or below the rate of return on total assets. A. Factoring C. Mortgage. B. Leverage. D. Restructuring 1. The use of financial leverage by the firm has a potential impact on which of the following?
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This note was uploaded on 11/22/2010 for the course CAC BSA taught by Professor Kairus during the Spring '10 term at Korea University.

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16 x11 FinMan D - FinancialManagement (D.Risk&Leverage)...

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