Chapter 10—Risk and Capital Budgeting
MULTIPLE CHOICE
1.
Operating leverage describes the relationship between...
a.
EBIT and sales
b.
taxes and sales
c.
debt and equity
d.
fixed costs and variable costs
ANS:
A
DIF:
E
REF:
10.1 Choosing the Right Discount Rate
2.
Everything else being equal a higher corporate tax rate...
3.
Which of the following is considered a type of real options
4.
A manager who wants to find out at which point a project’s profits and costs are equal will conduct
a(n)
5.
The appropriate cost of capital for a project depends on . . .
a.
the type of assets used in the project (that is, whether they are current or fixed assets)
b.
the interest rate on the firm's outstanding longterm bonds
c.
the type of security issued to finance the project
d.
the risk associated with the project
ANS:
D
DIF:
M
REF:
10.1 Choosing the Right Discount Rate
6.
The following data have been computed for a firm: when sales are $20,000, EBIT is $5,000 and oper
ating leverage is 2.5.
Suppose sales increase to $23,000; what is the new level of EBIT?
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7.
Bavarian Sausage, Inc. has a cost equity of 22% and a beta of 1.8.
The expected market return is 14%.
What is the riskfree rate?
DIF:
M
REF:
10.1 Choosing the Right Discount Rate
8.
Bavarian Sausage has a beta of 1.8. The risk free rate is 5% and the expected market risk premium is
12%. What is the company’s cost of equity?
DIF:
E
REF:
10.1 Choosing the Right Discount Rate
NARRBEGIN: Nevercrash Airlines
Nevercrash Airline
Nevercrash Airline has a capital structure that consists of 30% debt and 70% equity. The company’s
cost of debt is 7%. The company has a beta of 1.9. The risk free rate equals 4.5% and the expected re
turn on the market portfolio is 15%.
NARREND
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 Spring '11
 Min
 Corporate Finance, Cost Of Capital, Debt, Net Present Value, Weighted average cost of capital

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