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1.    A company has the following financial data: Sales = 30,000,000, Variable Costs = 12,500,000, Fixed

Costs = 9,050,000, Interest Expense = 2,750,000. What is the company's degree of financial leverage?

a.     1.40

b.    1.48

c.     1.15

d.    2.75











2.    Company A has a very high degree of operating leverage. If Company A's sales declines, what will happen to EBIT?

a.     EBIT will remain the same

b.    EBIT will increase

c.     Smaller decrease in EBIT

d.    Larger decrease in EBIT


3.    What effect do changes in financing have on Weighted Average Cost of Capital (WACC)?

a.     As bond interest goes up, the amount that can be deducted from taxes goes down.

b.    As more capital sources are added to WACC, the cost goes down due to diversification.

c.     As the number of capital sources increase, the WACC will change.

d.    Even though the mix of equity financing versus debt financing changes, the WACC remains the same.


4.    Why would a company pursue equity financing if debt financing is cheaper?

a.     An extraordinary reliance on debt might lead to insolvency.

b.    A high degree of debt financing lowers the ownership of shareholders

c.     Equity financing is tax deductible and can act as a tax shelter.

d.    A high reliance on equity results in a better run company

5.    A hybrid security has one of the following characteristics.

a.     It can provide attractive returns when the market increases

b.    It facilitates a more accurate calculation of the CAPM model

c.     It offers low risk coupled with advantages of ownership

d.    It allows owners to convert their security to bonds


6.    If market interest rates increase, how does that affect the weighted average cost of capital?

a.     The cost of equity increases

b.    The cost of debt increases

c.     The cost of equity can be deducted from taxes

d.    The cost of debt decreases


7.    Which ratio is used in working capital management?

a.     Dupont Equation

b.    Return on equity

c.     Earnings per share

d.    Current Ratio


8.     What is the advantage for a company to hold cash?

a.     Holding cash is better than short term investments

b.    Some customers demand cash payments

c.     Operational cash requirements can vary

d.    Cash can be used to reduce accounts receivable


9.    Why would a company use 'float' in their cash management practices?

a.     Float affects the delivery of cash into bank accounts

b.    Inventory balance is lower as a result of float.

c.     Float is employed to record income and expense.

d.     Float would be minimized in the payment of PP&E purchases


10. What do the terms 2%10, Net 45 mean?

a.     2% return allowance after ten days or there will be a $45 charge

b.    2% expected return has a 10% change of happening of 45% probability if it doesn't

c.     2% add on if not paid 10 days after the 45 day pay period

d.    2% discount if paid in 10 days or everything has to be paid in 45 days.










11. Which three costs are associated with holding inventory?

a.     Sales costs

b.    Opportunity costs

c.     Interest costs

d.    Product costs

e.     Storage costs

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