1. 1.

1 points

If I believe in the basic principle of a risk-reward relationship, my conclusion

regarding security ratings and yields between an Aaa bond and a Baa bond would
be that:

o the Aaa bond would have the lower yield.

o the Aaa bond would have the higher yield.
o the Baa bond would have lower default risk.
o default risks would differ but yields would be equal.

Incorrect/Not answered

2. 2.

1 points

A firm’s degree of operating leverage (DOL) depends primarily upon its

o sales variability.
o level of fixed operating costs.
o closeness to its operating break-even point.
o debt-to-equity ratio.

Incorrect/Not answered

3. 3.

1 points

An EBIT-EPS indifference analysis chart is used for

o evaluating the effects of business risk on EPS.

o examining EPS results for alternative financing plans at varying EBIT
levels.
o determining the impact of a change in sales on EBIT.
o showing the changes in EPS quality over time.

Incorrect/Not answered
4. 4.

1 points

EBIT is usually the same thing as:

o funds provided by operations.

o earnings before taxes.
o net income.
o operating profit.

Incorrect/Not answered

5. 5.

1 points

In the context of operating leverage break-even analysis, if selling price per unit
rises and all other variables remain constant, the operating break-even point in
units will:

o fall
o rise.
o stay the same.
o still be indeterminate until interest and preferred dividends paid are known.

Incorrect/Not answered

6. 6.

1 points

If a firm has a DOL of 5 at Q units, this tell us that:

o if sales rise by 5%, EBIT will rise by 5%.

o if sales rise by 1%, EBIT will rise by 1%.
o if sales rise by 5%, EBIT will fall by 25%.
o if sales rise by 1%, EBIT will rise by 5%.

Incorrect/Not answered
 7. 7.

1 points

This statistic can be used as a quantitative measure of relative “financial risk.”

o coefficient of variation of earnings per share (CVEPS)

o coefficient of variation of operating income (CVEBIT)
o (CVEPS – CVEBIT)
o (CVEPS + CVEBIT)

Incorrect/Not answered

8. 8.

1 points

A firm’s degree of total leverage (DTL) is equal to its degree of operating

leverage its degree of financial leverage (DFL).

o plus
o minus
o divided by
o multiplied by

Correct

9. 9.

1 points

The further a firm operates above its operating break-even point, the closer its
degree of operating leverage (DOL) measure approaches

o minus one.
o zero.
o one.
o infinity.

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1. A single, overall cost of capital is often used to evaluate projects because:

o it avoids the problem of computing the required rate of return for each
investment proposal.
o it is the only way to measure a firm's required return.
o it acknowledges that most new investment projects have about the same
degree of risk.
o it acknowledges that most new investment projects offer about the same
expected return.

Incorrect/Not answered

2. 2.

1 points

The cost of equity

capital is all of the

following EXCEPT

o the minimum rate that a firm should earn on the equity- financed part of an
investment.
o a return on the equity- financed portion of an investment that, at worst,
leaves the market price of the stock unchanged.
o by far the most difficult component cost to estimate.
o generally lower than the before-tax cost of debt.

Incorrect/Not answered

3. 3.

1 points
 In calculating the proportional amount of equity financing employed by a firm, we
should use:

o the common stock equity account on the firm's balance sheet.

o the sum of common stock and preferred stock on the balance sheet.
o the book value of the firm.
o the current market price per share of common stock times the number of
shares outstanding

Incorrect/Not answered

4. 4.

1 points

To compute the required rate of return for equity in a company using the CAPM, it
is necessary to know all of the following EXCEPT:

o the risk-free rate.

o the beta for the firm.
o the earnings for the next time period.
o the market return expected for the time period.

Incorrect/Not answered

5. 5.

1 points

The common stock of a company must provide a higher expected return than the
debt of the same company because

o there is less demand for stock than for bonds.

o there is greater demand for stock than for bonds.
o there is more systematic risk involved for the common stock.
o there is a market premium required for bonds.

Incorrect/Not answered

6. 6.
 1 points

In calculating the costs of the individual components of a firm’s financing, the

corporate tax rate is important to which of the following component cost formulas?

o common stock.
o debt
o preferred stock.
o none of the above.

Incorrect/Not answered

7. 7.

1 points

A quick approximation of the typical firm’s cost of equity may be calculated by

o adding a 5 percent risk premium to the firm's before-tax cost of debt.

o adding a 5 percent risk premium to the firm's after-tax cost of debt.
o subtracting a 5 percent risk discount from the firm's before-tax cost of
debt.
o subtracting a 5 percent risk discount from the firm's after-tax cost of debt.

Incorrect/Not answered

8. 8.

1 points

Market values are often used in computing the weighted average cost of capital
because

o this is the simplest way to do the calculation.

o this is consistent with the goal of maximizing shareholder value.
o this is required in the U.S. by the Securities and Exchange Commission.
o this is a very common mistake.

Incorrect/Not answered

9. 9.
 1 points

For an all-equity financed firm, a project whose expected rate of return

plots should be rejected.

o above the characteristic line

o above the security market line
o below the security market line
o below the characteristic line

Incorrect/Not answered

10. 10.

1 points

Some projects that a firm accepts will undoubtedly result in zero or negative
returns. In light of this fact, it is best if the firm

o adjusts its hurdle rate (i.e., cost of capital) upward to compensate for this
fact.
o adjusts its hurdle rate (i.e., cost of capital) downward to compensate for
this fact.
o does not adjust its hurdle rate up or down regardless of this fact.
o raises its prices to compensate for this fact.

Incorrect/Not answered

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