Question 1: The optimal capital structure is that structure which:
- reduces overall leverage
- reduces or eliminates only financial leverage
- gives the highest stock price
- provides the best risk versus return scenario for investors
- carries extra options for timing and future events.
Question 2: Select the best combination below of risk as it relates to a company's sales and a company's profits.
- financial risk / business risk
- foreign exchange risk / interest rate risk.
- business risk / financial risk.
- business risk / interest rate risk.
- interest rate risk / investment risk.
Question 3: Operating leverage targets
- the percent of costs that are fixed
- the usage of labor.
- outsourcing
- variable costs
Question 4: Fill in the blank. Considering one industry, all firms must have _________ capital structures to be optimal.
- identical
- similar
- dissimilar
- any number of combinations of
Question 5: Capital rationing is:
- the allocation of available capital to projects best suited to be undertaken, at the present time.
- Applying an even distribution of capital; all departments get the same funding.
- Applying a distribution of capital based on the % of profits generated by each department.
- borrowing conservatively.
- none of the above.
Question 6: As operating leverage increases, all things being equal,
- the lower the break even point will be
- variable costs per unit will decrease
- the higher the sales volume needed to break even.
- variable costs per unit will increse
- all of the above.
Question 7: If the analytical results of projects "N" and "M" are:
M: NPV = $450, IRR 12%
N: NPV = $500, IRR = 12%
Which of the following would be correct?
Your company has an historical return for its shareholders at 15%; therefore, both projects are rejected.
- If they are mutually exclusive, you would reject "N".
- If they are not mutually exclusive, you can accept both because they have a positive NPV.
- Reject both because there is no way both can have the same IRR with different NPV's.
- "A" and "C" are correct answers.
Question 8: Which of the following is not considered a "real option"?.
- flexibility
- growth
- timing
- replacement
- abandonment
Question 9: The concept of sunk costs is most associated with which of the following:
- Baywatch
- abandonment costs or options to abandon if you decide to do something else.
- Working capital needed to start a business
- Net after tax but before interest and principal payments.
- none of these!
Question 10: Which of the following is not an example of a real option?
- Quitting a job
- Leaving school before you graduate
- Paying off a debt obligation early
- dropping one quiz grade in this course
- renting an asset instead of buying that asset
Question 11: What is the after-tax cost of debt for a firm in the 35% tax bracket that pays 15% on its debt?
- 5.25%
- 9.75%
- 12.17%
- 20.25%
Question 12: A project has the following projected outcomes in dollars: $250, $350, and $500. The probabilities of their outcomes are 25%, 50%, and 25% respectively. What is the expected value of these outcomes?
- $362.5
- $89.4
- $94.5
- $178.3
Question 13: Financial risk refers to the:
- risk of owning equity securities.
- risk faced by equity holders when debt is used.
- general business risk of the firm.
- possibility that interest rates will increase.
Question 14: A firm's capital structure is represented by its mix of:
- assets.
- liabilities and equity.
- assets and liabilities.
- assets, liabilities and equity.
Question 15: Risk is usually measured as the :
- potential loss.
- variability of outcomes around some expected value.
- probability of expected values.
- potential expected loss.
Question 16: What is the return on equity for a firm with 15% return on assets, 10% return on debt, and a .75 debt/equity ratio?
- 18.75%
- 20.00%
- 23.75%
- 26.25%
Question 17: An increase in a firm's financial leverage will:
- increase the variability in earnings per share.
- reduce the operating risk of the firm.
- increase the value of the firm in a non-MM world.
- increase the WACC.
Question 18: Which of the following could SIGNAL to investors that the future prospects of the company are bright?
- Borrow significantly more money (increase financial leverage).
- Sell new equity shares in the open market.
- Sell stock the company had listed as Treasury Stock.
- Pay down debt.
- all of the above.
Question 19: Trade off theory of leverage relates
- returns to stock holders as bond leverage increases
- returns to both owners and debt holders as leverage increases
- operating versus financial aspects of leverage
- commission costs associated with equity (stock. trading versus bond trading
- tax benefits of debt versus increase chance of defaulting on debt.
Question 20: Which of the following is an example of restructuring the firm?
- Dividends are increased from $1 to $2 per share.
- A new investment increases the firm's business risk.
- New equity is issued and the proceeds repay debt.
- A new Board of Directors is elected to the firm.
Question 21: The stability of a firm's operating income is the focus of:
- financial leverage.
- weighted-average cost of capital.
- capital structure.
- business risk.
Question 22: The capital asset pricing model (CAPM.:
- uses the risk free rate
- relates risk versus return
- uses a premium for added risk
- all of the above
- none of the above
Question 23: Optimal Capital structure is:
- easily attained; just plug in variables to the formula.
- achieved through trial and error by leveraging financial assets.
- static once the optimal point is reached.
- a great academic discussion but cannot be determined in dynamic financial markets for any given period of time.
- constant, but each industry, as defined by NAICS, has its own debt/equity mix.
Question 24: Asymmetric information occurs when:
- all parties have complete information
- one party has less information than the other.
- all analysts agree about future earning predictions
- No one has any information
- none of the above