{99809F6E-777C-483B-9EA0-9B65E3D51D29}.tb13

{99809F6E-777C-483B-9EA0-9B65E3D51D29}.tb13 - CHAPTER 13...

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(Difficulty: E = Easy, M = Medium, and T = Tough) Multiple Choice: Conceptual Easy: Business risk Answer: c Diff: E 1 . A decrease in the debt ratio will generally have no effect on . a. Financial risk. b. Total risk. c. Business risk. d. Market risk. e. None of the above is correct. (It will affect each type of risk above.) Business risk Answer: d Diff: E 2 . Business risk is concerned with the operations of the firm. Which of the following is not associated with (or not a part of) business risk? a. Demand variability. b. Sales price variability. c. The extent to which operating costs are fixed. d. Changes in required returns due to financing decisions. e. The ability to change prices as costs change. Business risk Answer: d Diff: E N 3 . Which of the following factors would affect a company’s business risk? a. The level of uncertainty regarding the demand for its product. b. The degree of operating leverage. c. The amount of debt in its capital structure. d. Statements a and b are correct. e. All of the statements above are correct. Chapter 13- Page 1 CHAPTER 13 CAPITAL STRUCTURE AND LEVERAGE
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Business and financial risk Answer: d Diff: E 4 . Which of the following statements is most correct? a. A firm’s business risk is solely determined by the financial characteristics of its industry. b. The factors that affect a firm’s business risk are determined partly by industry characteristics and partly by economic conditions. Unfortunately, these and other factors that affect a firm’s business risk are not subject to any degree of managerial control. c. One of the benefits to a firm of being at or near its target capital structure is that financial flexibility becomes much less important. d. The firm’s financial risk may have both market risk and diversifiable risk components. e. None of the statements above is correct. Optimal capital structure Answer: e Diff: E 5 . Which of the following statements is most correct? a. As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected EPS. b. The optimal capital structure simultaneously maximizes EPS and minimizes the WACC. c. The optimal capital structure minimizes the cost of equity, which is a necessary condition for maximizing the stock price. d. The optimal capital structure simultaneously minimizes the cost of debt, the cost of equity, and the WACC. e. None of the statements above is correct. Optimal capital structure Answer: c Diff: E 6 . From the information below, select the optimal capital structure for Minnow Entertainment Company. a. Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50. b. Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90. c. Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.
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This note was uploaded on 05/07/2011 for the course FIN 12 taught by Professor Dived during the Spring '11 term at National Taiwan University.

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{99809F6E-777C-483B-9EA0-9B65E3D51D29}.tb13 - CHAPTER 13...

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