FIN/370 “Week Four” Individual Assignment
Answer the following multiple-choice questions:
1. The mix of debt, preferred stock, and common equity with which the firm plans to raise capital is called the: a) Financial risk b) Operating leverage c) Business risk d) Target business structure
2. The extent to which fixed costs are used in a firm’s operations is called its: a) Financial leverage b) Operating leverage c) Total leverage d) Foreign risk exposure
3. As a rule, the optimal capital structure is found by determining the debt-equity mix that maximizes expected EPS. a) True b) False
4. In general, an increase in the corporate tax rate would cause firms to use less debt in their capital structures. a) True b) False 5. Suppose you know that your firm is facing relatively poor prospects but needs new capital. If you also know that investors do not have this information, signaling theory would predict that you would: a) Issue debt to maintain the returns of equity holders.
b) Issue equity to share the burden of decreased equity returns between old and new shareholders. c) Both A and B
6. The ability to borrow money at a reasonable cost when good investment opportunities arise is called: a) Symmetric information b) Asymmetric information (c) Capital structure d) Reserve borrowing capacity
7. Texas Products Inc. has a division that makes plastic composite bags for the space industry. The division has fixed costs of $45,000 per month, and it expects to sell 45,000 bags per month. If the variable cost per bag is $6.00, what price must the division charge in order to break even? a) $6.00 b) $7.00 c) $8.00 d) $9.00
8. Chip Motors has $20 million in assets, which are financed with $4 million...
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