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

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Financial Management (D. Risk & Leverage) 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: 14.Which of the following situations is likely to have the highest combined business and financial risk impact upon a business? Operating Leverage 2. Which of the following is a key determinant of operating leverage? 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? 11.The extent to which fixed costs are used in a firm’s operations is called its: Financial Leverage
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