multiple_choice.financial_management

1. If a firm substitutes fixed for variable costs, which of the following will occur? A. The use of financial leverage will be increased.

B. The degree of operating leverage will be increased.

C. The break-even level of output will be reduced.

D. The profits will always be higher.

2. If investors want to limit financial risk and maximize their control of the business, which of the following

forms of business should they prefer?

A. Limited partnership

B. S corporation

C. Sole proprietorship

D. Corporation

3. A firm does not obtain financial leverage by

A. issuing preferred stock.

B. issuing common stock.

C. issuing bonds.

D. borrowing from the bank.

4. Unsuccessful use of financial leverage

A. increases earnings per share.

B. increases investors' rate of return.

C. decreases earnings per share.

D. decreases interest expense.

5. Which of these situations offers the best rationale for organizing a business as a limited partnership?

A. Management rejects the idea of personally assuming liability for the business.

B. You're an entrepreneur and you want two others' expertise, former business partners, to help execute your business plan.

C. Management needs to raise money through a stock offering, but does not want to relinquish control of the business to stockholders.

D. You want your small new business, which is operating out of your garage, to pay you and your partner (your spouse) dividends for which income tax will only be paid by you or your business, not both.

6. Which of the following is a correct statement about corporate losses?

A. They are carried forward three years and then carried back.

B. They are carried back three years and then carried forward.

C. They offset other sources of income in prior years.

D. They are carried forward to future years.

7. Break-even analysis requires knowing the relationship between

A. sales and total costs.

B. sales and earnings.

C. sales and assets.

D. total revenues and fixed costs.

8. If a firm produces 50,000 widgets and sells each unit for $20.50, what is the total revenue generated by

this production?

A. $1,025,000

B. $100,250

C. $10,250

D. $10,250,000

9. If Sam's Diner has an EBIT of $350,000, what are the diner's net earnings after paying $50,000 in

taxes and $34,000 in interest?

A. $266,000

B. $334,000

C. $311,000

D. $434,000

10. An increase of cost of capital will

A. decrease an investment's NPV.

B. Increase an investment's NPV.

C. increase an investment's IRR.

D. decrease an investment's IRR.

11.

Coupon rate = 7 percent

Average tax rate = 32%

Price of common stock = $80

Price of preferred stock = $50

Bond yield risk premium = 7%

Return of the market = 12%

Marginal tax rate = 35%

Common stock dividend (Do) = $6

Preferred stock dividend (Do) = $4

Growth rate of common stock dividend = 6%

Risk-free rate of return = 6%

Beta = 1.2

According to the information given, what is the cost of equity using the expected growth method?

A. 13.2 percent

B. 13.95 percent

C. 12 percent

D. 14.4 percent

12. Which of the following statements about retained earnings is correct?

A. Retained earnings are the firm's cheapest source of funds.

B. Retained earnings have the same cost as new shares of stock.

C. Retained earnings have no cost.

D. Retained earnings are cheaper than the cost of new shares.

13. The internal rate of return will be higher if the cost of

A. capital is lower.

B. the investment is lower.

C. the investment is higher.

D. capital is higher.

14.

Coupon rate = 7 percent Average tax rate = 32%

Price of common stock = $80Price of preferred stock = $50

Bond yield risk premium = 7%

Return of the market = 12%

Marginal tax rate = 35%

Common stock dividend (Do) = $6

Preferred stock dividend (Do) = $4

Growth rate of common stock dividend = 6% Risk-free rate of return = 6%

Beta = 1.2

According to the information given, what is the cost of debt? A. 2.45 percent

B. 4.55 percent

C. 6.25 percent

D. 7.0 percent

15. NPV may be preferred to IRR because

A. IRR makes more conservative assumptions concerning reinvesting.

B. NPV excludes salvage value.

C. IRR excludes salvage value.

D. NPV makes more conservative assumptions concerning reinvesting.